His American Express card offered unlimited 5% rewards at grocery stores and pharmacies after he had spent $6,500. So Mr. Anikeev used his AmEx card to buy prepaid Visa gift cards at grocery stores, routinely stopping during his commute and purchasing the maximum allowed per day at a store. He often used the gift cards to buy money orders, then used the money orders to make deposits in his bank account, then used that money to pay his credit-card bill.
In a $500 transaction, the 5% rewards would yield $25—more than enough to cover gift-card fees of about $5 and the $1 fee on the money order.
The millions of dollars of those transactions tripped the sensors at the Treasury Department’s Financial Crimes Enforcement Network, which investigates money laundering, an IRS lawyer said during the trial. That agency kicked the case to the IRS, which said he owed back taxes. Mr. Anikeev took the government to court, bringing a tub of gift cards to his trial to demonstrate what he did.
“They sort of picked the fight with the wrong person,” said his lawyer, Jeffrey Sklarz. “They should have picked someone who was a hot mess.”
Judge Goeke issued a split ruling. Rewards earned on purchases of Visa gift cards aren’t taxable, he ruled, because the cards are products; most but not all of Mr. Anikeev’s transactions happened that way. Rewards earned on purchases of money orders or reloading debit cards are taxable, the judge determined. The IRS already says rewards can be taxable if they are earned without spending, such as a bonus for opening a bank account.