Konstantin Anikeev, an experimental physicist, collected everything he needed for research far beyond his field.
His materials included American Express cards, the government’s view that credit card rewards are not income, and his own willingness to spend time buying gift cards and money orders. He took the concept of personal finance websites: take advantage of the difference between unlimited 5% 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, ”said Mr Anikeev. “Others need a Large Hadron Collider or something similar. But this one was a bit more accessible. “
It worked (most of the time).
Mr. Anikeev in 2013 and 2014 – including $ 6.4 million in credit card charges – led to an Internal Revenue Service audit 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 Internal Revenue Service’s long-standing practice, which says credit card rewards are usually non-taxable rebates. In other words, buying a pair of shoes for $ 100 and getting a 5% reward is basically a $ 95 purchase, not $ 5 in income. But the judge also offered the IRS options for tougher enforcement.
Mr. Anikeev in personal finance started when he was a graduate student with a lot of time but little money. The Connecticut native drew on ideas from personal finance websites, he testified at his 2019 trial.
In 2009, like many others, he used a rewards credit card to purchase $ 1 coins from the US Mint, taking advantage of the lack of shipping costs.
By 2013, he found the strategy that would land him in tax court.
His American Express card offered unlimited 5% rewards at grocery stores and pharmacies after spending $ 6,500. So Mr. Anikeev used his AmEx card to buy prepaid Visa gift cards from supermarkets, routinely stopping on his commute and buying the maximum allowable amount per day at a store. He often used the gift cards to buy money orders, then used the money orders to deposit money into his bank account, and then used that money to pay for his credit card bill.
In a $ 500 transaction, the 5% rewards would net $ 25 – more than enough to cover the roughly $ 5 gift card cost and the $ 1 on the money order.
The millions of dollars from those transactions triggered the sensors at the Treasury Department’s Financial Crimes Enforcement Network, which is investigating money laundering, an IRS attorney said at the trial. That agency kicked the matter to the IRS, who said he was back in taxes. Mr. Anikeev took the government to court and brought a tray of gift certificates to his trial to demonstrate what he was doing.
“They kind of picked up a fight with the wrong person,” said his lawyer, Jeffrey Sklarz. “They should have picked someone who was a hot mess.”
Judge Goeke made a split. Rewards earned from the purchase of Visa gift cards are not taxable, he ruled, because the cards are products; most but not all of Mr. Anikeev’s transactions took place that way. Rewards earned from money order purchases or reloading debit cards are taxable, the judge ruled. The IRS already says that rewards can be taxable if earned without expenses, such as a bank account opening bonus.
The two sides still have to calculate what Mr. Anikeev could pay in additional taxes. Andrew Johnson, an American Express spokesman, declined to comment on Mr. Anikeev’s case. He said the company uses a “combination of strategies” to control 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 awards ignore that the IRS classifies money order companies as services and that money orders are items, and that any rewards from buying them should not be taxable.
Judge Goeke drafted an alternative way for the IRS to attack future trades like Anikeev’s.
Perhaps, he wrote, if gift cards are owned, the rewards reduce a person’s cost base in that property. Under that logic, exchanging gift cards for money orders would be selling real estate for a profit. The judge urged the IRS to consider regulations or public statements to offer clearer rules in case people get confused.
“How do you know when you’re crossing the line?” said Robert Tobey, a partner at Grassi accounting firm in New York.
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The case highlights a flaw in the IRS approach to credit card rewards, said Stephanie Hoffer, a professor of tax law at the McKinney School of Law at Indiana University.
Treating them like discounts makes sense for purchasing products, she said. But in Mr Anikeev’s case, there is no purchase of goods or services, only a circular flow of money.
“I was really shocked by the outcome of the case. To me this seems to be clear income, ”said Ms. Hoffer. Ultimately, does this taxpayer have access to wealth? The answer is clearly yes. “
Regular credit card rewards users don’t have to worry about earning taxable income. Still, the case is a warning that activities far beyond the norm could attract the government’s attention, Mr Tobey said.
Mr. Anikeev said he is not doing anything like what he did in 2013 and 2014, although he is still just as interested in personal finance.
“He’s a very mathematical, brilliant person,” said his lawyer, Mr. Sklarz. “And this was just something he thought was fun.”
Write to Richard Rubin at [email protected]
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