Konstantin Anikeev, an experimental physicist, gathered everything he needed for an investigation away from his field.
His materials included American Express cards, the government’s view that credit card rewards are not income, and his own desire to spend time buying gift cards and money orders. He extracted the concept from personal finance sites: Exploits the difference between 5% unlimited rewards and lower fees for gift cards and warrants.
“If someone has a theory, they can test it experimentally. Some are easier to test, “said Anikeev. “Others need a big hadron collider or something. But it was a little more affordable. ”
(Especially) it worked.
Mr Anikeev’s financial optimization plan in 2013 and 2014 – including $ 6.4 million in credit card expenses – led to an audit of the domestic revenue service and the finding that he and his wife had more than $ 310,000 in income that should have been taxed.
Judge Robert Goeke’s decision last month largely confirmed the long-term practice of the Internal Revenue Service, which says credit card rewards are usually tax-free rebates. In other words, buying a pair of shoes for $ 100 and getting a 5% reward is really a $ 95 purchase, not $ 5 in revenue. But the judge also offered IRS avenues for tougher enforcement.
Mr. Anikeev’s interest in personal finance began when he was a graduate student, with a long time but little money. The Connecticut resident relied on ideas from personal finance sites, testified at his 2019 trial.
In 2009, he, like many others, used a rewards credit card to buy $ 1 coins from the US Mint, taking advantage of the lack of shipping fees on them.
By 2013, he had found the strategy that would leave him in front of the tax court.
His American Express card offered 5% unlimited rewards at grocery stores and pharmacies after spending $ 6,500. So Mr. Anikeev used his AmEx card to buy prepaid Visa gift cards at grocery stores, usually stopping during the commute and purchasing the maximum allowed per day at a store. He often used gift cards to buy money orders, then used them to make deposits in his bank account, then used that money to pay his credit card bill.
In a $ 500 transaction, the 5% rewards would produce $ 25 – more than enough to cover the gift card fees of about $ 5 and the $ 1 commission for the payment order.
Millions of dollars in these transactions have triggered sensors in the Treasury Department’s Financial Crime Enforcement Network, which is investigating money laundering, an IRS lawyer said during the trial. The agency gave the file to the IRS, which said it owed taxes back. Mr Anikeev took the government to court, bringing a bathtub of gift cards to the trial to prove what he did.
“They took a kind of fight with the wrong person,” said his lawyer, Jeffrey Sklarz. “He should have chosen someone who was a hot mess.”
Judge Goeke issued a divided judgment. Rewards earned on the purchase of Visa gift cards are not taxable, he said, because the cards are produced; most, but not all, of Mr. Anikeev’s transactions took place in this way. Rewards earned on the purchase of money orders or recharging debit cards are taxable, the judge ruled. The IRS already says that rewards can be taxable if earned without expenses, such as a bonus for opening a bank account.
The two sides have yet to calculate what additional taxes Mr Anikeev could owe. Andrew Johnson, an American Express spokesman, declined to comment on Mr Anikeev’s case. He said the company uses a “combination of strategies” to comply with the rules of rewards programs that do not allow the purchase of cash equivalents. The IRS does not comment on active litigation.
Mr Anikeev said he was somewhat disappointed. He said the judge’s distinctions ignore the fact that the IRS classifies money order companies as services and that payment orders are elements, and therefore any reward from their purchase should not be taxable.
Judge Goeke proposed an alternative way for the IRS to attack future transactions such as those of Mr. Anikeev.
Maybe, he wrote, if gift cards are property, the rewards reduce a person’s cost base on that property. Following this logic, exchanging gift cards with money orders would be selling the property for a profit. The judge asked the IRS to consider regulations or public statements to provide clearer rules if people are confused.
“How do you know when to cross the line?” said Robert Tobey, a partner at New York-based accounting firm Grassi.
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The case highlights a flaw in the IRS’s approach to credit card rewards, said Stephanie Hoffer, a professor of tax law at Indiana University’s McKinney Law School.
Treating them as discounts makes sense for product purchases, she said. But in Mr Anikeev’s case, there is no purchase of goods or services, only a circular cash flow.
“I was really shocked by the outcome of the case. To me, this clearly seems to be revenue, “said Ms Hoffer. “At the end of the day, does this taxpayer have an adherence to wealth? The answer is clearly yes. ”
Regular credit card users should not be afraid to earn taxable income. Even so, the case is a warning that far-outside activity could attract the government’s attention, Mr Tobey said.
Mr Anikeev said he did nothing similar to what he did in 2013 and 2014, although he was equally interested in personal finance.
“He is a very mathematical, brilliant person,” said his lawyer, Mr Sklarz. “And that was just something he thought was fun.”
Write to Richard Rubin at [email protected]
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