The U.S. Court of Appeals for the Seventh Circuit has vacated and remanded the Tax Court's decision in Hyatt Hotels Corp. v. Commissioner, holding that the Tax Court erred by failing to consider whether payments into Hyatt's centralized loyalty program fund are excludable from income under the claim of right doctrine. The Seventh Circuit also rejected the Tax Court's narrow interpretation of Treas. Reg. § 1.451‑4, which provides a special accounting method for trading stamps and premium coupons (the -4 method). On remand, the Tax Court will be tasked with determining whether Hyatt must report loyalty program income under the claim of right doctrine and, if so, whether Hyatt is eligible to use the -4 method for estimated future redemption costs.

Hyatt operates a loyalty program that allows members to earn reward points and later redeem them for hotel stays. It managed a centralized fund to support this program. Hotels made payments to the fund when the loyalty program issued reward points to members, and the fund made payments to hotels when a member redeemed points for a hotel stay. Hyatt reported neither the fund's income nor the fund's expenses for tax purposes. The Internal Revenue Service (IRS) asserted that Hyatt should have reported both. During the Tax Court proceeding, Hyatt argued that the fund's income is excludable under the claim of right doctrine or the trust fund doctrine and, if the fund's income is includible, then Hyatt is entitled to use the -4 method to reduce the current income inclusion by certain estimated future redemption costs. The Tax Court held that the fund's income was includible under the trust fund doctrine and that Hyatt could not rely on the -4 method.

On appeal, the Seventh Circuit held that the Tax Court erred in treating the fund's income as includible under the trust fund doctrine without considering Hyatt's argument for exclusion under the claim of right doctrine. This is because the claim of right doctrine provides a broader basis for exclusion than the trust fund doctrine. Hyatt asked the Seventh Circuit to rule on the claim of right issue, but the court declined, choosing instead to vacate the Tax Court's decision and remand with instructions for the Tax Court to undertake the requisite analysis.

Although the Seventh Circuit observed that it didn't need to reach the -4 issue, which focused on the meaning of the regulatory reference to "other property," the court nevertheless found "it prudent to address the issue now, in the event that it arises on remand." In this regard, the court "observe[d] only that the tax court erred when it interpreted 'other property' to mean tangible property." However, on remand the Tax Court retains "the flexibility to consider other arguments regarding Hyatt's eligibility to use the [-4 method], should that issue arise."

The Seventh Circuit's decision is a significant win for Hyatt and similarly situated taxpayers. However, Hyatt's dispute with the IRS remains ongoing and now returns to the Tax Court for a decision on the claim of right doctrine.

For more information, please contact: 

James R. Gadwood, jgadwood@milchev.com, 202-626-1574

George A. Hani, ghani@milchev.com, 202-626-5953

Katherine Chace, kchace@milchev.com, 202-626-5894

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