Seventh Circuit Opens The Door On Loyalty Program Tax Exclusions

What You Need to Know

• Key takeaway #1

  While the Seventh Circuit vacated and remanded the Tax Court's decision, it did not reverse it. The Tax Court will have the opportunity to apply the claim of right doctrine and may still conclude that contributions to the Fund constitute taxable income. Accordingly, the decision should not be treated as a definitive victory for taxpayers.

• Key takeaway #2

  Companies operating loyalty programs—particularly those with centralized funds financed by mandatory contributions—should evaluate whether their current income treatment is defensible under the claim of right doctrine. The Seventh Circuit’s decision clarifies that the trust fund doctrine is not the exclusive means of establishing that a taxpayer lacks a claim of right to funds received subject to obligations, potentially opening additional avenues for exclusion arguments.