The Tax Times: Hyatt’s $300 Million Rewards Tax Fight Gets New Life In Seventh Circuit Appeal

Hyatt’s long‑running battle with the IRS over the tax treatment of its hotel rewards program fund just took a major turn at the U.S. Court of Appeals for the Seventh Circuit. In Hyatt Hotels Corp. & Subsidiaries v. Commissioner, No. 24‑3239, the court vacated a Tax Court decision that had largely sided with the IRS and sent the case back for a do‑over on some key legal theories. For tax professionals advising brands with loyalty or rewards programs, this is a case to watch.

The core issue: who owns the loyalty fund?

Hyatt operates a centralized loyalty program funded by payments from Hyatt‑owned and franchisee hotels. These payments go into a dedicated rewards fund used to provide free or discounted hotel stays and other benefits to members. The fund also earns investment income.

Hyatt’s position has been that it does not have a beneficial interest in this fund. According to Hyatt, the money is effectively held and used for the benefit of the participating hotels and loyalty members, and it can only be used for program purposes. The IRS saw it very differently, asserting that roughly $300 million of fund balances and income should be treated as Hyatt’s taxable income, generating about $71 million in additional tax for the years at issue.

At the Tax Court, Hyatt lost that argument: the court agreed with the IRS that the fund income belonged to Hyatt and allowed the Service to pull a large cumulative amount into income via an “accounting method” adjustment. The Tax Court also rejected Hyatt’s alternative method‑of‑accounting arguments, including an attempt to use rules analogous to the trading stamp (premium) method.

What the Seventh Circuit said

The Seventh Circuit did not simply affirm or reverse on the same grounds. Instead, it took issue with how the Tax Court framed and analyzed the case.

Two aspects of the opinion deserve particular attention:

· The claim of right doctrine

· The trading stamp / premium method and “other property”

Claim of right: more than a failed trust

Hyatt did not rely solely on a formal trust theory. It also argued that, under the claim of right doctrine, the amounts in the fund were not currently taxable to Hyatt because its control was significantly constrained and the funds were burdened by obligations to provide future rewards.

The Tax Court focused heavily on whether Hyatt had established something like a trust or similar arrangement, concluded that Hyatt had not, and largely treated that as the end of the matter. The Seventh Circuit held that was legal error. The presence or absence of a formal trust does not substitute for a thorough claim‑of‑right analysis.

In other words, even if Hyatt technically “owns” the fund for some purposes, the Tax Court still needed to address whether, given the restrictions and obligations attached, Hyatt had income under the claim of right doctrine in the years in question. The Seventh Circuit declined to perform that fact‑intensive analysis itself and instead vacated and remanded for the Tax Court to do it properly.

Trading stamp method: are points “other property”?

Hyatt also argued that its rewards program should be accounted for using a trading stamp / premium‑type method, which essentially allows a taxpayer to recognize income currently but deduct a reasonable estimate of the future cost of redeeming points, premiums, or similar obligations.

The Tax Court rejected this on the categorical ground that the statute and regulations apply only where the stamp or premium is redeemable for “merchandise, cash, or other property,” and it read “other property” to mean tangible property. Because Hyatt’s points are redeemable for hotel stays and services, the court concluded they fell outside the regime.

The Seventh Circuit disagreed. It held that nothing in the text required “other property” to be tangible and that the Tax Court erred as a matter of law by reading in a tangibility requirement. That does not automatically hand Hyatt a win on the method question—Hyatt still must satisfy all the statutory and regulatory criteria—but it removes a key legal barrier that would have excluded many modern loyalty programs from trading stamp‑style treatment simply because they provide stays, miles, or services rather than physical goods.

Why this matters beyond Hyatt

The implications of this case extend well beyond one hotel chain. Many industries now run large‑scale loyalty programs—hotels, airlines, retailers, financial institutions—and many centralize contributions from affiliates or franchisees into a common fund.

Several themes emerging from Hyatt are likely to be important for those programs:

· Form vs. substance of the fund
The Seventh Circuit’s criticism of the Tax Court’s “no trust, taxpayer loses” approach signals that the analysis cannot end with labels. Restrictions on use of funds, contractual obligations to affiliates, and program documents may all be relevant in deciding when and to whom income is recognized.

· Claim of right in the loyalty context
Loyalty funds often sit on substantial “breakage” and accumulated balances that are not immediately needed to pay redemptions. Hyatt suggests that courts must confront how the claim of right doctrine applies to those amounts when they are subject to real limitations and future obligations. That could affect both inclusion timing and whether some amounts are ever income to the program operator at all.

· Method‑of‑accounting options
By rejecting a bright‑line tangibility requirement for “other property,” the Seventh Circuit opens the door for loyalty programs that provide services (like travel or lodging) to argue for a trading stamp‑style method where the statutory conditions can be met. That could provide better matching between program revenues and redemption costs and reduce large one‑time inclusion adjustments.

What to watch on remand

The Tax Court now must revisit Hyatt with two clear instructions: actually analyze the claim of right question and reconsider trading stamp eligibility without a tangibility gloss.

On remand, key questions will include:

· To what extent did Hyatt truly have unrestricted control over the fund versus holding it under meaningful contractual or practical constraints?

· How do the loyalty program documents allocate rights and obligations between Hyatt and participating hotels?

· Can Hyatt demonstrate that its rewards points and redemptions fit within the statutory and regulatory framework for trading stamp / premium accounting, now that “other property” is not confined to tangibles?

For tax advisors, this is a good moment to inventory clients’ loyalty and rewards structures, especially where there is a centralized fund, significant breakage, or complex affiliate arrangements. Program documents, funding mechanics, and financial statement treatment will all be relevant if the IRS challenges the income characterization or method of accounting.

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