Hyatt Hotels Corporation & Subsidiaries v. Commissioner of Internal Revenue, No. 24-3239 (7th Cir. Apr. 22, 2026)

Hyatt Hotels Corporation operates a global hospitality brand that encompasses owned, managed, and franchised properties. During the 2009 through 2011 tax years under scrutiny, Hyatt operated a customer loyalty program known as the Gold Passport Program, which was mandatory for all Hyatt-branded hotels, including the 75-80% of properties owned by third-party franchisees. Members earned reward points that could be redeemed for hotel stays, perks, or airline miles.

To fund the costs of this program, Hyatt maintained the Gold Passport Fund (the Fund). Third-party hotel owners were required to remit 4% of qualifying purchases into the Fund when points were issued, or the actual cost of airline miles if the guest elected that reward. The Fund additionally accumulated revenue from investments in securities and from the direct sale of reward points to customers. Hyatt utilized the Fund to compensate hotel owners when points were redeemed and to cover administrative and advertising expenses. Historically, since the program's inception in 1987, Hyatt essentially disregarded the Fund for tax purposes. However, in March 2017, the IRS issued a notice of deficiency, contending that the payments remitted to the Fund by third-party owners, as well as revenue from direct point sales and investment holdings, should have been reported as gross income to Hyatt. The IRS took the position that Hyatt could only deduct the costs of redeemed points in the year of actual redemption.

Taxpayer's Request for Relief

Hyatt petitioned the Tax Court for a redetermination of the deficiencies, advancing two primary arguments. First, Hyatt argued that the disputed receipts were not its income under the claim of right doctrine, which historically defines income as "earnings [received] under a claim of right and without restriction as to its disposition" (Healy v. Comm'r, 345 U.S. 278, 281 (1953)). Furthermore, Hyatt asserted that exclusion was appropriate under the trust fund doctrine, contending the Fund was collectively owned and legally restricted for program purposes, conferring only an "incidental and secondary" benefit to Hyatt (Affiliated Foods, Inc. v. Comm'r, 154 F.3d 527, 531, 533 (5th Cir. 1998)).

Secondarily, Hyatt argued that if the Fund was deemed its property and taxable as income, it was entitled to utilize the trading stamp method of accounting under Treasury Regulation § 1.451-4. This method permits accrual basis taxpayers who issue trading stamps or premium coupons redeemable in "merchandise, cash, or other property" to deduct the estimated cost of future redemptions at the time of issuance.

The Tax Court ruled against Hyatt on both fronts. It summarily bypassed the claim of right doctrine and analyzed the issue strictly under the trust fund doctrine. The Tax Court determined that because the loyalty program generated substantial advertising benefits and goodwill for Hyatt, the company possessed a "sufficient beneficial economic interest in the Fund" to classify the funds as gross income. Additionally, the Tax Court denied the use of the trading stamp method, applying the canon of ejusdem generis to interpret "other property" in Treas. Reg. § 1.451-4(a)(1) as strictly tangible property, thereby excluding intangible rewards like hotel stays and airline miles.

Panel's Analysis of the Law

Reviewing the Tax Court's legal conclusions de novo, the Seventh Circuit focused heavily on the interplay between the claim of right doctrine and the trust fund doctrine. The panel underscored that the classic formulation of the claim of right doctrine considers funds to be income when they are "received and treated ... as belonging to him" (Healy, 345 U.S. at 282).

The Court addressed a fundamental disagreement between the parties: whether the claim of right doctrine serves merely as a rule of inclusion, or if it acts as an independent rule of exclusion. Relying on the Supreme Court's ruling regarding customer deposits in Commissioner v. Indianapolis Power & Light Company, 493 U.S. 203 (1990), the Seventh Circuit emphatically stated that the claim of right doctrine is a rule of exclusion. The panel declared, "The claim of right doctrine provides a basis for income exclusion that is independent from and broader than the trust fund doctrine".

The Court further clarified the relationship between the two doctrines, defining the trust fund doctrine as merely "a more tailored application of claim of right principles". By satisfying the trust fund doctrine, a taxpayer avoids income recognition because the funds do not belong to them; they act as a trustee. However, the court stressed that the inverse is not automatically true: "funds that aren't eligible for exclusion under the trust fund doctrine may still be excludable under the claim of right doctrine". Using commercial loans as an analogy, the court illustrated that while loans confer an economic benefit (failing the trust fund doctrine test), they are excluded from income because the accompanying repayment obligation prevents the recipient from asserting a claim of right.

On the issue of the trading stamp method, the Seventh Circuit took the opportunity to correct the Tax Court's narrow statutory interpretation, observing that "cash isn't always tangible; it refers to '[m]oney or its equivalent' and 'balances in bank accounts'". Because cash can be intangible, tangibility is not a common denominator among the terms "merchandise" and "cash," rendering the lower court's application of ejusdem generis to exclude intangible hotel stays and airline miles erroneous.

Application of the Law to the Facts

In applying its analysis to the dispute at hand, the Seventh Circuit found that "the tax court erred" by ceasing its analysis after Hyatt failed the trust fund doctrine test. By concluding that the Fund was Hyatt's income solely due to the economic benefit Hyatt derived, the lower court neglected to evaluate the broader implications of the claim of right.

The panel also dismantled the IRS's reliance on Angelus Funeral Home v. Comm’r, 407 F.2d 210 (9th Cir. 1969), noting that while the Ninth Circuit found immediate economic benefit in that case, the true trigger for taxation was the taxpayer's "absolute power to benefit itself," a level of control reflective of the claim of right test. The Seventh Circuit noted that the Tax Court "stopped well short of finding the kind of absolute power present in Angelus Funeral Home" regarding Hyatt's control over the Fund.

Because the Tax Court "never applied the claim of right test and, in fact, explicitly declined to resolve issues relevant to that analysis, such as whether the Fund was subject to a legally enforceable use restriction," the appellate court refused to conduct the factual analysis itself.

Conclusions

The Seventh Circuit concluded that "it was therefore error for the tax court to treat Fund income as income to Hyatt based only on Hyatt's failure to satisfy the trust fund doctrine, without considering Hyatt's arguments under the claim of right doctrine". As an appellate body ("a court of review, not first view"), the panel declined Hyatt's request for outright reversal. Instead, the court vacated the Tax Court's decision and remanded the case with explicit instructions for the lower court to determine whether the Fund constituted Hyatt's income under the claim of right doctrine.

Furthermore, regarding the alternative argument, the Seventh Circuit ruled that the Tax Court erred in barring Hyatt from the trading stamp method solely on the grounds that "other property" must be tangible. While leaving the ultimate eligibility determination for remand, the appellate court definitively struck down the tangibility restriction.

The opinion was authored by Judge Kirsch, and the panel (Judges Kirsch, Jackson-Akiwumi, and Maldonado) was unanimous in its decision.

Prepared with assistance from NotebookLM.