Hyatt operated the Gold Passport Program, which allowed members to earn points for hotel stays and other perks. All Hyatt-branded hotels, including those owned by third parties, contributed to a centralized fund to cover program expenses. The IRS argued that payments into this fund from third-party owners, direct point sales, and investment income were Hyatt’s taxable income.
The Tax Court agreed with the IRS, applying the "trust fund" doctrine. It determined that because Hyatt benefited from increased hotel stays and brand goodwill, it had a sufficient economic interest in the fund to make the income taxable. The court did not address Hyatt’s alternative argument that the "claim of right" doctrine provided a basis for excluding the income.
On appeal, the Seventh Circuit held that the Tax Court’s analysis was incomplete. The court clarified that the claim of right doctrine provides a broader basis for excluding income than the trust fund doctrine. While the trust fund doctrine is a specific application of claim of right principles, funds that fail the trust fund test may still be excluded if they do not satisfy the claim of right doctrine.
The Seventh Circuit noted that the claim of right doctrine focuses on the parties’ rights and obligations at the time of payment, rather than solely on economic benefit. Citing Supreme Court precedent, the court explained that income is generally excluded if the taxpayer is subject to an obligation to repay or lacks unrestricted control over the funds.
Because the Tax Court never applied the claim of right test, the Seventh Circuit remanded the case for further proceedings. The lower court must now determine whether the funds at issue constituted income to Hyatt under the correct legal standard.
The appellate court also addressed Hyatt’s argument that it should be allowed to use the trading stamp method of tax accounting. The Tax Court had rejected this method, ruling that "other property" under the relevant regulation referred only to tangible property, excluding hotel stays and airline miles.
The Seventh Circuit observed that the Tax Court erred in interpreting "other property" as limited to tangible items. The court noted that cash is not always tangible and that tangibility is not a common trait of cash and merchandise. However, because the case was remanded on the income question, the Seventh Circuit did not definitively rule on Hyatt’s eligibility to use the trading stamp method.