Konstantin Anikeev, an experimental physicist, gathered everything he needed for research outside his field.
His materials included American Express cards, the government’s view that credit card rewards are not revenue, and his own willingness to spend time buying gift cards and money orders. He took out the concept of personal finance websites – take advantage of the difference between 5% unlimited rewards and lower rates on gift cards and remittances.
“If you have a theory, you can test it experimentally. Some are easier to try, ”said Anikeev. “Others require a large hadron collider or something similar. But this was a little more accessible.
It worked (mostly).
Mr. Anikeev’s financial optimization plan in 2013 and 2014, including $ 6.4 million in credit card charges, led to an audit of the Internal Revenue Service and the finding that he and his wife they had incomes of more than $ 310,000 that should have been taxed.
Judge Robert Goeke’s decision last month largely upheld the usual Internal Revenue Service 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 really a $ 95 purchase, not a $ 5 income. But the judge also offered the IRS avenues for tougher 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 was inspired by ideas from personal finance websites, he stated in his 2019 trial.
In 2009, he, like many others, used a reward credit card to buy $ 1 coins in U.S. currency, taking advantage of the lack of shipping costs.
In 2013 he found the strategy that would take him to a 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 Visa prepaid gift cards at grocery stores, routinely stopping during his trip and buying the maximum allowed per day in a store. He often used gift cards to buy money orders, then used them to make deposits into his bank account, and then used them to pay off his credit card bill.
In a $ 500 transaction, the 5% rewards would produce $ 25, more than enough to cover the $ 5 gift card commissions and the $ 1 postage commission.
Millions of dollars in these transactions fired sensors from the Treasury Department’s financial crime enforcement network, which is investigating money laundering, an IRS lawyer said during the trial. This agency filed the case with the IRS, which said it owed taxes. Anikeev took the government to court, bringing a tub of gift cards to his trial to prove what he did.
“They fought with the wrong person,” his lawyer, Jeffrey Sklarz, said. “They should have chosen someone who was a mess.”
Judge Goeke handed down a split sentence. Rewards earned with purchases of Visa gift cards are not taxable, he said, because the cards are products; most, but not all, of Mr. Anikeev’s transactions went like this. The judge determined that the rewards obtained with the purchase of money orders or the recharge of debit cards are taxable. The IRS already says rewards can be taxable if earned without spending, such as a bonus for opening a bank account.
Both parties have yet to calculate what additional taxes Mr Anikeev could owe. Andrew Johnson, a spokesman for American Express, declined to comment on Mr. Anikeev’s case. He said the company uses a “combination of strategies” to monitor the rules of reward programs that do not allow the purchase of cash equivalents. The IRS does not comment on active litigation.
Mr Anikeev said he was a little disappointed. He said the judge’s distinctions ignore that the IRS classifies money ordering companies as services and that warrants are items and therefore any reward arising from their purchase should not be taxable.
Judge Goeke proposed an alternative way for the IRS to attack future transactions such as that of Mr. Anikeev.
Perhaps, he wrote, if gift cards are owned, the rewards reduce a person’s cost base on that property. Following this logic, exchanging gift cards for money orders would be to sell properties for a profit. The judge urged the IRS to consider regulations or public statements to provide clearer rules in case people are confused.
“How do you know when you 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 McKinney School of Law at Indiana University.
Treating them as bonuses makes sense for product purchases, he said. But in the case of Mr. Anikeev, there is no purchase of goods or services, only a circular cash flow.
“I was very surprised by the outcome of the case. To me, that clearly seems to be income, ”Ms. Hoffer said. “After all, does this taxpayer have an adherence to wealth? The answer is clearly yes. “
Users who pay by credit card should not be afraid to earn taxable income. Still, the case is a warning that an activity far out of the norm could get the government’s attention, Tobey said.
Mr Anikeev said he does nothing like what he did in 2013 and 2014, although he is still interested in personal finance.
“He’s a very mathematical and brilliant person,” his lawyer, Mr Sklarz, said. “And that was just something I thought was fun.”
Write to Richard Rubin to [email protected]
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