IRS Practice and Procedure News Briefs for March 2021

PROPER METHOD OF FILING A TAX RETURN – Harold v. U.S., Case No. 20-10514 (E.D. Mich. 2021)

Why this Case is Important: The date that a tax return is filed is important – IRS deadlines for collecting taxes and auditing returns are set when those returns are filed, and, and filing prior to the filing deadline prevents the IRS from assessing late-filing penalties. The date that a return is filed also is one factor in determining whether the taxes due with that return are dischargeable in bankruptcy. For a return to be “filed,” it must be submitted in accordance with IRS rules. In this case, the taxpayer did not follow these rules and it cost her.

Facts: In Harold, the taxpayer was working with an IRS revenue officer in 2009 to resolve some past-due tax liabilities. In June 2009, before the extended filing deadline for her 2008 tax return, she faxed a signed copy of her 2008 tax return to the revenue officer as part of the process of entering into a payment plan. She did not recall mailing this return to the IRS service center. In 2016, while the taxpayer was dealing with another revenue officer, that officer requested that the taxpayer file several past-due tax returns, including her 2008 return. She provided a copy of the 2008 return and indicated that it was filed with the first revenue officer in 2008. Since the IRS did not have any record of the return being filed in 2008, it assessed the 2008 tax liability in 2016. A few days later, the taxpayer filed a Chapter 7 bankruptcy petition. One issue in the bankruptcy was whether the 2008 taxes were dischargeable, since, according to the IRS, the requisite amount of time (two years) had not passed between the date the return was filed, which the IRS argued was in 2016, and the bankruptcy filing. The taxpayer argued that the return was filed in 2008 and that the taxes therefore were dischargeable. The Bankruptcy Court agreed with the IRS and the taxpayer appealed to District Court.

Law and Conclusion: At issue was the date on which the taxpayer filed her 2008 return, and specifically whether the taxpayer having provided the revenue officer with a signed copy of her return in 2009 constituted her “filing” the return. Section 6091 of the Internal Revenue Code and related regulations provide that individual income tax returns must be filed with the IRS service center in the district in which the taxpayer resides, with any person assigned the responsibility to receive returns. This generally does not include revenue officers. However, the Code does not define the term “filed.” The Court relied on Sixth Circuit case law holding that a document is filed with the IRS when it “is delivered and received,” and that submitting a tax return to a revenue officer does not constitute “delivery” of the return because that is not the prescribed method for filing returns under the Code. In this case, because in 2009 the taxpayer only submitted her 2008 return to the revenue officer, and not to an IRS service center, the Court held that the return was not “delivered” to the IRS at that time, and therefore was not filed until 2016. Therefore, the Court upheld the Bankruptcy Court’s decision and found in favor of the IRS.

TAXATION OF CREDIT CARD REWARDS – Anikeev v. Commissioner, T.C. Memo 2021-23 (2021)

Why this Case is Important: Whether certain cash-back and non-cash rewards are taxable is a complex issue. For instance, the Tax Court has held that non-cash rewards received for maintaining a bank account, which can be used to purchase airline tickets, are taxable when the tickets are purchased. On the other hand, cash and non-cash credit card rewards generally have been treated as non-taxable. This case presents a twist on that general rule.

Facts: In Anikeev, the taxpayers earned over $300,000 in 2013 and 2014 by purchasing Visa gift cards using their American Express credit card, buying money orders with those gift cards, depositing the money orders into their bank account, and paying their American Express bills with the funds from the money orders. Occasionally, rather than purchasing gift cards, they used their credit card to purchase money orders or fund reloadable debit cards and used MoneyGram to pay their American Express bills from those money orders or debit cards. This scheme was profitable because they received reward dollars from American Express of up to five percent of their total purchases, including purchases of Visa gift cards, money orders, and reloadable debit cards, which rewards exceeded the fees they paid to use the Visa gift cards, money orders, and debit cards. The IRS examined the taxpayers’ 2013 and 2014 income tax returns and determined that the rewards the taxpayers received from using their American Express cards to purchase gift and debit cards and money orders constituted taxable income and issued a notice of Deficiency assessing liabilities of over $100,000. The taxpayers filed a Tax Court petition contesting the notice of deficiency.

Law and Analysis: Section 61(a) of the Internal Revenue Code broadly defines gross income to generally include all income, from whatever source derived. However, the IRS has determined that adjustments to the purchase price of goods or services are not included in gross income, and therefore are not subject to income tax. Historically, the IRS’s position has been that credit card rewards, whether in the form of points or cash back, are not taxable because they represent a reduction in the purchase price of the item purchased. However, in this case, the IRS asserted that because the gift and debit cards and money orders purchased by the taxpayers were not products, but instead were “cash equivalents,” the rewards received by the taxpayers did not represent reductions in purchase prices but instead constituted taxable income. With respect to the gift cards, the Court disagreed. It stated that because the gift cards are not redeemable for cash, they are not cash equivalents, but instead are products. On the other hand, because the reloadable debit cards could be used as cash and the money orders could be converted into cash by depositing them, the Court found that they were cash equivalents rather than products. Accordingly, the Court held that the reward dollars used to purchase Visa gift cards were not taxable, but those used to purchase reloadable debit cards and money orders were taxable.

If you would like more details about these cases, please contact me at 312-888-4113 or jnesser@lavellelaw.com