Konstantin Anikeev, an experimental physicist, put together everything he needed for an investigation far beyond his field.
His material includes American Express cards, the government’s view that credit card rewards are not an income, and his own willingness to spend time buying gift cards and money orders. He takes the concept from personal finance sites: take advantage of the difference between 5% unlimited rewards and lower fees on gift cards and money orders.
If you have a theory, you can test it experimentally. “Some are easier to test,” he said. Anikeev said. Others need a Large Hadron Collider or something. But this one was a little more accessible. ‘
It worked (mostly).
The financial optimization plan of mr. Anikeev in 2013 and 2014 – with $ 6.4 million in credit card costs – led to an audit by the Internal Revenue Service and the finding that he and his wife had more than $ 310,000 in taxable income.
Judge Robert Goeke’s decision last month largely confirmed the practice of the Internal Revenue Service, which states that credit card rewards are usually not taxable rebates. In other words, buying a pair of shoes for $ 100 and getting a 5% reward is really a purchase of $ 95, not $ 5 income. But the judge also offered the IRS ways for a stricter enforcement.
Mr. Anikeev’s interest in personal finance began when he was a graduate student with a lot of time but little money. The Connecticut resident used ideas from personal finance websites, he testified during his 2019 trial.
In 2009, he, like many others, used a reward credit card to buy $ 1 coins from the US currency, taking advantage of the lack of shipping costs.
By 2013, he had found the strategy that would land him in tax court.
His American Express card offered unlimited rewards of 5% at grocery stores and pharmacies after spending $ 6,500. So Mr. Anikeev uses his AmEx card to buy prepaid Visa gift cards at grocery stores. He stops regularly during his commute and buys the maximum per day at a store. He often uses the gift cards to buy money orders, then uses the money bills to make deposits in his bank account, and then uses the money to pay his credit card account.
In a $ 500 transaction, the 5% rewards would yield $ 25 – more than enough to cover gift card fees of about $ 5 and the $ 1 fee at the money order.
The IRS attorney said during the trial that the millions of dollars of transactions were being investigated by the censors at the Treasury Department’s financial crime network, which is investigating money laundering. The agency kicked the case to the IRS, which said it owed taxes. Mr. Anikeev took the government to court and brought a bowl of gift cards to his trial to demonstrate what he had done.
“They chose the fight with the wrong person,” his attorney, Jeffrey Sklarz, said. “They should have chosen someone who was a mess.”
Judge Goeke delivered a split verdict. Rewards earned when purchasing Visa gift cards are not taxable, he ruled, because the cards are products; most, but not all, of the transactions of mr. Anikeev did not, took place in this way. The judge ruled that rewards are earned when purchasing money orders or recharging debit cards. The IRS already says that rewards can be taxable if earned without spending, such as a bonus for opening a bank account.
The two parties have yet to calculate what additional tax Mr. Anikeev can blame. Andrew Johnson, a spokesman for American Express, declined to comment on Anikeev’s case. He said the company uses a “combination of strategies” to police the rules of rewards programs that do not allow purchases of cash equivalents. The IRS does not comment on active litigation.
Mr. Anikeev said he was somewhat disappointed. He said the judge’s distinction ignores that the IRS classifies money order businesses as services and that money orders are items, and therefore the reward of purchasing them should not be taxable.
Judge Goeke used an alternative way for the IRS to close future transactions such as Mr. To attack Anikeev.
Perhaps, he wrote, if gift cards are property, the reward reduces the person’s cost base in that property. Following the logic, selling gift cards for money orders would sell property for a profit. The judge urged the IRS to consider regulations or public statements to offer clearer rules if people are confused.
“How do you know when you cross the border?” says Robert Tobey, a partner at the Grassi Accounting Firm in New York.
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The case highlights a lack of the IRS approach to credit card rewards, said Stephanie Hoffer, a professor of tax law at McKinney School of Law at Indiana University.
Treating it like discounts makes sense for buying products, she said. But in the case of Mr. Anikeev there is no purchase of goods or services, just a circular cash flow.
“I was really shocked by the outcome of the case. To me, it clearly seems to be an income, ‘said Ms. Hoffer said. ‘At the end of the day, does this taxpayer have an accession to wealth? The answer is clearly yes. ”
Ordinary credit card rewards do not require users to fear earning taxable income. However, the case is a warning that activities far beyond the norm could attract the government’s attention, said Mr. Tobey said.
Mr. Anikeev said he does not do anything like he did in 2013 and 2014, although he is still just as interested in personal finance.
“He is a very mathematical, brilliant person,” said his lawyer, Mr. Sklarz, said. “And it was just something he liked.”
Write to Richard Rubin by [email protected]
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