Hyatt fights tax on loyalty program fund at Seventh Circuit

CHICAGO (CN) — The Hyatt Hotels Corporation told a Seventh Circuit panel Tuesday that a lower court erred when it deemed income from Hyatt’s customer loyalty program as taxable.

Hyatt’s customer reward program, the Gold Passport Program, allows members to collect points for their stays at Hyatt-branded hotels, which they can then redeem for future hotel stays, airline miles, or other perks. Hyatt owned about 25% of Hyatt-branded hotels and the rest were owned by third parties, but all of the hotels operated under the loyalty program regardless.

When the loyalty program was created in 1987, Hyatt also created a segregated fund called the Gold Passport Fund, which would be used exclusively for program-related purposes, including paying hotel owners for the redemption of points.

“Since Hyatt operated the program for the benefit of all Hyatt-branded hotels, Hyatt consistently treated the fund as collectively owned by hotel owners — not as its own property,” Melissa Sherry, an attorney at Latham Watkins, wrote in the appellant’s brief.

The Internal Revenue Service, however, took a different approach. The agency said Hyatt should’ve treated the fund as its own property and mailed the corporation a notice of deficiency for the tax year of 2005 as well as 2008-2011. Hyatt sought a redetermination of the deficiencies in the United States Tax Court, but the court ultimately sided with the IRS.

Sherry argued before the three-judge appeals panel that the tax court’s decision should be reversed because of the claim of right doctrine. The claim of right doctrine is a fundamental tax law principle that determines when someone would claim income on their taxes.

The doctrine has a two-part test established in the 1932 Supreme Court case North American Oil Consolidated v. Burnet , which says “a person receives taxable income if that person (1) ‘receives earnings under a claim of right,’ and (2) ‘without restriction as to [their] disposition.’”

Sherry said the record made it clear that neither prong in the claim of right doctrine was satisfied because the fund wasn’t treated as Hyatt’s property, but rather the property of the owners of Hyatt-backed hotels. She argued that the tax court improperly refused to apply the claim of right doctrine and instead conflated it with a more onerous one called the trust fund doctrine.

Nishant Kumar, an attorney for the IRS commissioner, argued before the panel of judges Tuesday that claim of right doctrine has nothing to do with Hyatt’s case.

“We think what you have here is the principle of the dog that didn’t bark,” Kumar said.

Kumar said the cases Hyatt relied on in its briefs all had to do with loans or had some other looming prospect of repayment, which inherently calls into question the taxpayer’s dominion over the funds.

“Here there is no dispute, or looming prospect that Hyatt is going to have to return those funds,” he said.

U.S. Circuit Judge Candace Jackson-Akiwumi, a Joe Biden appointee, asked Kumar if it’s correct that the claim of right answers the question of when we can claim income while the trust fund doctrine is a question of whether certain earnings constitute income.

“You would be right, your honor,” Kumar answered. “I think one of the treatises suggest … in some cases it’s not just a when, it’s also a whether it’s income to begin with.”

“Where does it say that in the Supreme Court jurisprudence? I understand you point to a treatise but point to the Supreme Court opinion that says that,” U.S. Circuit Judge Thomas Kirsch, a Donald Trump appointee, asked.

Kumar couldn’t offer a specific case, but said it would be incommensurate with language in other Supreme Court cases that broadly describes income.

Joining Jackson-Akiwumi and Kirsch on the panel was U.S. Circuit Judge Nancy Maldonado, a Biden appointee. The panel did not indicate when it might rule.

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