Customer loyalty programs - Hyatt Hotels ruling

Income from Customer Loyalty Programs – Observations ofHyatt Hotels Corp. v. Commissioner, 7thCir., No. 24-03239, 4/22/26

The U.S. Circuit Court of Appeals for the Seventh Circuit recently vacated the Tax Court’s ruling that Hyatt Hotels was required to include loyal program receipts from its Gold Passport Program in taxable income for tax years 2009-2011.The Tax Court ruled that Hyatt had control over program funds under the “trust fund doctrine” and must therefore include them in taxable income, which amounted to approximately $300 million for the years at issue.The Tax Court also held that Hyatt could not use the old trading stamp regulation (Treas. Reg. § 1.451-4) to offset program receipts based on estimated future redemptions because hotel stays and airline points are not “merchandise, cash or other property.”

The Seventh Circuit remanded both issues to Tax Court to reconsider whether Hyatt had a “claim of right” to the loyalty program fees and whether hotel stays and airline awards were intangible property eligible for the reserve offset under the trading stamp regulation.

Observations

-In 2018, the Tax Cuts and Jobs Act (TCJA) amended the “all-events” test under section 451(b) such that revenue of an accrual basis taxpayer cannot be recognized later than when it’s recognized for financial reporting purposes.Regulations that followed generally treat loyalty program fees and gift card receipts as gross income that may be eligible for the one-year deferral method.See, e.g.,Treas. Reg. § 1.451-8(c)(10)Example18.

-Although the years in Hyatt pre-date section 451(b), Hyatt’s position is likely that section 451 doesn’t apply because it doesn’t have a fixed right to the income in the first place (i.e.,income is not realized) and therefore the timing provisions of section 451 are not applicable.

-The Seventh Circuit suggests a broad reading of the claim of right doctrine may allow for program receipts to be excluded stating that the Tax Court did not consider all relevant factors including whether Hyatt was subject to legally enforceable use restrictions, similar to restrictions placed on non-taxable deposits or loan proceeds.

-Considering the Seventh Circuit’s taxpayer favorable reading of the claim of right doctrine, gift card companies and loyalty program funds should review the terms of their programs and whether there is a position to exclude program receipts from taxable income.

-For companies that have a claim of right to program receipts (and therefore taxable income), consider changing to a method of accounting that uses a reserve for future redemptions under the Seventh Circuit’s favorable reading of the trading stamp regulation (Treas. Reg. § 1.451-4).Note, that this change in method of accounting must be filed under IRS non-automatic consent procedures and that the IRS National Office does not have a favorable view of the trading stamp reserve method.