As an inquiry into the nature of taxable income it is more profound, though. The IRS went after him, claiming that the $310,000 was income and he should have to pay taxes on it. He replied, no, it was just rebates on purchases. The IRS is sort of obviously right. Surely the only way to get $310,000 of rebates on purchases is by having more than $310,000 of taxable income. If you make $3.1 million at your job and buy $3.1 million of stuff and get 10% cash back then, sure, you got $310,000 of rebates, and those rebates are not income. If you make $100,000 in salary and cycle it frantically through gift cards until you earn $310,000 of rewards, it can’t really be the case that your taxable income was only $100,000. If that $310,000 was just a reduction in the price of goods that you purchased, where did you get all the money to do all that purchasing? Surely from income, right? 7
The IRS mostly lost in Tax Court though; here is the opinion. Basically the judge found that the perpetual-motion machine works and is non-taxable; if you buy gift cards with your credit card, use the gift cards to buy money orders, and use the money orders to pay your credit card bill, then it’s not taxable income. 8 Seems wrong philosophically, but it’s based on the IRS policy that credit card rewards are not income. The judge writes:
This policy reflects the recognition that a taxpayer who avails himself or herself of a discount in acquiring goods and services has no accession to wealth. That taxpayer has retained more of his or her wealth than a taxpayer who pays full price for the same good or service, but that taxpayer has no additional income; he or she simply has reduced consumption. Although as Benjamin Franklin wisely observed, “[a] penny saved is two pence clear” (which became known more colloquially as “a penny saved is a penny earned”), the income tax law imposes a tax only on the future penny earned, not on the current penny saved.
That obviously is not what happened here—he did not reduce consumption—but if you have a general theory it will not always fit all the specific facts. Here the general theory is “rebates on consumption are not income.” You set up some extreme conditions, you run some experiments, and you see if the theory holds. Weirdly, it does.
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Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit.
1 Technically the rule is that the company has to disclose it “simultaneously, in the case of an intentional disclosure; and promptly, in the case of a non-intentional disclosure.” So if she’s going to meet a hedge fund and say “we made $1.75 this quarter,” the company needs to put out a press release simultaneously—more practically, *before* she meets the hedge fund—saying that. If she meets the hedge fund and accidentally blurts it out, the company can put out the press release as soon as she leaves the meeting. But best practice is to put it out before the meeting so there’s no doubt.
2 Byrne Hobart points out that AT&T’s alleged behavior is “healthier than the *old* way of beating estimates,” which was basically earnings manipulation and accounting fraud.“If AT&T really wants to come in a penny or two ahead of consensus, better to do that by browbeating consensus than by finding extra profits that don't really exist.”
3 The legal deadline for GameStop to file its 10-K with audited financial results for its last fiscal year is 75 days after the year ended, or mid-April. (GameStop is an “accelerated filer,” which means its 10-K is due 75 days after year-end; “large accelerated filers” have to file within 60 days, and that is the more normal filing time for big public companies. Earnings generally come before or alongside the 10-K.) Last year GameStop announced Q4 earnings on March 26, a bit less than two months after its fiscal-year end. GameStop doesn’t seem to have said when it will announce this year’s earnings, but Nasdaq expects earnings on March 25; Bloomberg’s ERN page says March 26.
4 To be clear, all this stuffdoesn’t matter for net-income-based corporate taxation. If a company has $500 of revenue and buys $100 of shoes and gets a$5 rebate, then its net income is $405, and it pays taxes on that, and it just doesn’t matter if the $5 increases “income” or reduces “expenses.” What makes personal taxation harder is that expenses are not generally deductible.
5 Of this, “$535 and $894 of the rewards accumulated in 2013 and 2014, respectively, were for the purchase of products other than Visa gift cards, debit cards, and money orders and thus are not subject to tax,” says the Tax Court. But $35,665 in 2013 and $276,381 in 2014 were from the disputed gift-card transactions.
6 Who is the “victim” here? Who paid him the $310,000? In a sense the answer is American Express, but it doesn’t seem to have cared. Anikeev’s “actions never offended American Express,” says the judge, and why should it? Presumably Amex charged grocery stores at least as much in interchange fees as it paid in rewards. Presumably the losers here were the grocery stores who sold $500 gift cards for $475 or something (net of Amex interchange fees) and then had them redeemed for $500 money orders.
7 No, fine, you can get it from savings—from previously taxed income—but that is clearly not what happened here either.
8 If you buy money orders directly with your credit card, the cash back on *those* purchases is taxable; Anikeev did some of that too.