Hyatt Hotels Corporation v. Commissioner of Internal Revenue — Vacated and Remanded

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April 22, 2026 Get Citation Alerts Download PDF Add Note

Hyatt Hotels Corporation & Subsidiaries v. CIR

Court of Appeals for the Seventh Circuit

• Citations: None known
• Docket Number: 24-3239

• Judges: Kirsch

• Opinion

• Authorities (22)

• Cited By (0)

• Summaries (0)

• Similar Cases (17.4K)

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Combined Opinion

by Kirsch

In the

United States Court of Appeals
For the Seventh Circuit

No. 24-3239
HYATT HOTELS CORPORATION & SUBSIDIARIES,
Petitioner-Appellant,
v.

COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.

Appeal from the United States Tax Court.
No. 13858-17 — Joseph W. Nega, Judge.

ARGUED SEPTEMBER 16, 2025 — DECIDED APRIL 22, 2026

Before KIRSCH, JACKSON-AKIWUMI, and MALDONADO,
Circuit Judges.
KIRSCH, Circuit Judge. Hyatt Hotels operated a loyalty pro-
gram that allowed members to earn points by spending
money at Hyatt-branded hotels. The program’s expenses
were paid out of a centralized fund, which Hyatt managed
and to which all Hyatt-branded hotels—including those
owned by third parties in management or franchise agree-
ments with Hyatt—were required to contribute. The fund also
derived some income from investing in securities and selling
2 No. 24-3239

rewards points directly to customers. The Internal Revenue
Service contends that Hyatt should have reported income to
the fund as income to Hyatt; the tax court agreed. On appeal,
Hyatt renews its argument that these payments into the fund
weren’t its income. If they were income, Hyatt claims that it
should be able to use the trading stamp method of tax ac-
counting, which would offset that income by associated costs.
Because we find that the tax court’s analysis was incomplete
when it considered whether these payments into the fund
were Hyatt’s income, we refrain from deciding either of the
issues raised by Hyatt. Instead, we vacate the tax court’s deci-
sion and remand the case for further proceedings consistent
with this opinion.
I
A
Hyatt Hotels Corporation & Subsidiaries is an interna-
tional hospitality company that owns, manages, and fran-
chises hundreds of hotels. Some of these hotels are owned by
Hyatt, but other Hyatt-branded hotels are owned by third
parties in management or franchise agreements with Hyatt.
From 2009 through 2011, the tax years at issue, Hyatt owned
about 20 to 25% of the hotels that bore its name.
Like other hotel chains, Hyatt operated a loyalty program
during the tax years at issue, called the Gold Passport Pro-
gram (Program). The Program allowed members to earn re-
wards points by spending money at Hyatt-branded hotels,
which could later be redeemed for hotel stays and perks or
travel miles. All Hyatt-branded hotels, including those
owned by third parties, were required to participate in the
Program.
No. 24-3239 3

To cover Program expenses, Hyatt managed the Gold
Passport Fund (Fund), to which all Hyatt-branded hotels
(those owned by Hyatt and otherwise) contributed. During
the tax years at issue, hotel owners were required to pay 4%
of qualifying purchases (i.e., purchases that earned Gold Pass-
port points) into the Fund at the time the points were issued.
Alternatively, if a Program member opted to earn travel miles
instead of Gold Passport points, hotel owners paid into the
Fund the actual cost of the miles. The Fund also derived some
income from investing Fund assets in securities and directly
selling Gold Passport points to customers. When a member
redeemed points at a hotel, which might be long after the
points were earned, Hyatt compensated the hotel owner for
the stay out of the Fund. The Fund also covered administra-
tive and advertising expenses.
According to Hyatt, the Program was a critical part of the
company’s broader marketing strategy and contributed to in-
creased stays by Program members. During the years at issue,
Hyatt’s internal analysis shows that each dollar spent on Pro-
gram advertising generated a return on investment of about
$8 for Hyatt-branded hotels.
B
Since the Program’s inception in 1987, Hyatt essentially ig-
nored the Fund for tax purposes. In March 2017, the Commis-
sioner of Internal Revenue issued Hyatt a notice of deficiency.
The IRS asserted that Hyatt should have reported all income
flowing into the Fund as its income. Some of that money (i.e.,
payments into the Fund by Hyatt-owned hotels) is not at issue
here because it’s already accounted for in Hyatt’s income; Hy-
att states that its owned hotels didn’t deduct those payments
as expenses and that they included all guest revenue in
4 No. 24-3239

income. But the IRS took the position that payments into the
Fund from third-party hotel owners, direct point sales, and
the Fund’s investment holdings were Hyatt’s income for tax
purposes. According to the IRS, Hyatt could then deduct the
cost associated with redeemed rewards points in the year of
redemption, which might be long after—if ever—the points
were earned.
Hyatt petitioned the tax court for a redetermination of the
deficiencies in the IRS’s notice. It made two arguments. First,
Hyatt contended that the disputed payments into the Fund
(i.e., payments from third-party-owned hotels, direct point
sales, and the Fund’s investments) weren’t its income—in
short, that Fund income wasn’t Hyatt’s income. Asserting that
the Fund was collectively owned by the hotel owners and
could only be used for Program purposes, Hyatt believed that
Fund income was properly excluded from its income under
the claim of right doctrine. That doctrine, “deeply rooted in
the federal tax system,” defines income as “earnings [re-
ceived] under a claim of right and without restriction as to its
disposition.” Healy v. Comm’r, 345 U.S. 278, 281 (1953) (citation
modified). Hyatt also maintained that exclusion was appro-
priate under the trust fund doctrine, which excludes from in-
come trust funds that the taxpayer must spend “for a speci-
fied purpose,” receiving, at most, an “incidental and second-
ary” benefit in return. Affiliated Foods, Inc. v. Comm’r, 154 F.3d
527, 531, 533 (5th Cir. 1998) (citation modified).
Second, Hyatt argued that if the Fund was Hyatt’s prop-
erty and Fund income was its income, then it was entitled to
use the trading stamp method authorized by Treasury Regu-
lation § 1.451–4. See 26 C.F.R. § 1.451–4(a)(1). Section 1.451–
4(a)(1) applies to accrual method taxpayers that “issue[]
No. 24-3239 5

trading stamps or premium coupons with sales,” which “are
redeemable by such taxpayer in merchandise, cash, or other
property.” Loyalty programs are the modern analog of the
physical trading stamps that retailers once issued as promo-
tions with sales of their products. If applicable, the trading
stamp method would permit Hyatt to deduct the estimated
cost (to it) of members redeeming their Gold Passport points
when those points were initially issued. Hyatt argued that the
perks for which Gold Passport points could be redeemed—
e.g., hotel stays and airline miles—were “other property”
within the meaning of § 1.451–4(a)(1), and thus that it was el-
igible to use the trading stamp method.
The tax court ruled against Hyatt on both issues. It disre-
garded Hyatt’s claim of right argument, finding that the doc-
trine didn’t provide a basis for excluding income under the
circumstances. Instead, the court applied the trust fund doc-
trine, assuming, without deciding, that the Fund was received
in trust subject to a legally enforceable restriction. It therefore
addressed only the benefit prong of the doctrine. Because Hy-
att profited from Program advertising through increased ho-
tel stays and brand goodwill, the court determined that Hyatt
“had a sufficient beneficial economic interest in the Fund” for
Fund income to constitute Hyatt’s income.
The tax court then held that Hyatt wasn’t eligible to use
the trading stamp method. Applying the canon of ejusdem
generis, the court reasoned that § 1.451–4(a)(1)’s “other prop-
erty” catch-all term was limited to tangible property. Since
hotel stays and airlines miles aren’t tangible, the court con-
cluded that Hyatt was not permitted to use the trading stamp
method.
6 No. 24-3239

II
We review the tax court’s legal conclusions de novo. Feld-
man v. Comm’r, 779 F.3d 448, 453–54 (7th Cir. 2015). On appeal,
Hyatt disputes that income to the Fund was Hyatt’s income
and that Hyatt may not use the trading stamp method. Re-
garding the income determination, Hyatt argues that the tax
court should have considered whether exclusion from income
was appropriate under the claim of right doctrine. We agree.
The claim of right doctrine provides a basis for income exclu-
sion that is independent from and broader than the trust fund
doctrine. The tax court therefore erred when it concluded that
Fund income was Hyatt’s income based on the trust fund doc-
trine, without considering Hyatt’s argument for exclusion
based on the claim of right doctrine.
Because we remand for the tax court to consider whether
Fund income constituted income to Hyatt under the claim of
right doctrine, we need not decide whether Hyatt is eligible
to use the trading stamp method. We only clarify an interpre-
tive issue that must be addressed, should that question arise
again.
A
We start by reviewing the tax court’s refusal to apply the
claim of right doctrine. The court disregarded Hyatt’s claim
of right arguments because it didn’t believe that the claim of
right doctrine provided a basis to exclude income in the cir-
cumstances presented. Instead, the court only considered Hy-
att’s arguments under the trust fund doctrine. The tax court
characterized that doctrine as a more tailored application of
claim of right principles and reasoned that if Fund income
wasn’t excludable under the trust fund doctrine, it must be
No. 24-3239 7

income to Hyatt. The issue before us is therefore whether the
claim of right doctrine operates as an independent basis to ex-
clude income and, if so, how that doctrine interacts with the
trust fund doctrine.
The classic formulation of the claim of right doctrine re-
gards as income “earnings [received] under a claim of right
and without restriction as to its disposition.” United States v.
Skelly Oil Co., 394 U.S. 678, 680 (1969) (quoting N. Am. Oil Con-
sol. v. Burnet, 286 U.S. 417, 424 (1932)). A taxpayer has a claim
of right to funds when they “are received and treated … as
belonging to him.” Healy, 345 U.S. at 282. Here, the parties
agree that the claim of right doctrine operates as one of in-
come inclusion, i.e., that funds satisfying the claim of right
doctrine are income. But they disagree about whether it also
operates as one of income exclusion—in other words, whether
failure to satisfy the claim of right doctrine means that the
funds at issue may be excluded from income.
Based on Commissioner v. Indianapolis Power & Light Com-
pany, 493 U.S. 203 (1990), the answer is yes. There, the monies
at issue were customer deposits held by a utility company,
which the company refunded to customers upon request and
if they demonstrated acceptable credit. See id. at 204. Consid-
ering whether those deposits were income to the company,
the Supreme Court observed that, under the claim of right
doctrine, a taxpayer “has received income” when he “ac-
quires earnings, lawfully or unlawfully, without the consen-
sual recognition, express or implied, of an obligation to repay
and without restriction as to their disposition[.]” Id. at 209
(quoting the formulation of the claim of right doctrine given
in James v. United States, 366 U.S. 213, 219 (1961), which in turn
cites the classic formulation from N. Am. Oil Consol., 286 U.S.
8 No. 24-3239

at 424). Applying that test to the customer deposits, the Court
found that because the deposits were “acquired subject to an
express ‘obligation to repay,’” they were not income to the
company. Id. The Court further emphasized that “whether
these payments constitute income when received … depends
upon the parties’ rights and obligations at the time the pay-
ments are made.” Id. at 211 (citation modified).
Indianapolis Power thus demonstrates that the claim of
right doctrine is an independent basis to exclude income; the
Court applied the doctrine and, finding it unmet, concluded
that the funds at issue were not income to the taxpayer. See
id. at 214; see also Fla. Progress Corp. & Sub. v. Comm’r, 114 T.C.
587, 599 (2000) (acknowledging Indianapolis Power as applying
the claim of right doctrine to decide “whether” funds consti-
tute income). Indeed, even before the Supreme Court decided
Indianapolis Power, tax courts regarded use of the doctrine to
exclude funds as “sound law.” Ancira v. Comm’r, 119 T.C. 135,
138 (2002) (quoting Diamond v. Comm’r, 56 T.C. 530, 541 (1971),
aff’d, 492 F.2d 286 (7th Cir. 1974)).
Satisfied that the claim of right doctrine operates as one of
exclusion, we now consider the relationship between that
doctrine and the trust fund doctrine. The trust fund doctrine
is also one of exclusion. It holds that trust funds are excluda-
ble from income when two requirements are met. First, the
taxpayer must be “obligated” to spend the money “for a spec-
ified purpose.” Affiliated Foods, Inc., 154 F.3d at 533 (quoting
Ford Dealers Advert. Fund, Inc. v. Comm’r, 55 T.C. 761, 771
(1971)). Second, the taxpayer may not receive any “profit,
gain, or other benefit” in return, unless it is merely “incidental
and secondary.” Id. at 531, 533 (citation modified); see also
No. 24-3239 9

Angelus Funeral Home v. Comm’r, 407 F.2d 210, 212 (9th Cir.
1969) (discussing “incidental” benefit).
We agree with the tax court that the trust fund doctrine is
a more tailored application of claim of right principles. In ef-
fect, it’s one way of determining that the taxpayer does not
have a claim of right to the funds at issue. If the funds satisfy
the trust fund doctrine, they do not “belong[] to” the taxpayer,
because he is serving as a trustee for another. Healy, 345 U.S.
at 282; see also id. at 283 (distinguishing funds received “un-
der a claim of right as a trustee” and those received “under a
claim of individual right”). What this means, as the tax court
recognized, is that funds excludable from income under the
trust fund doctrine are also excludable under the claim of
right doctrine.
However, the opposite isn’t true; funds that aren’t eligible
for exclusion under the trust fund doctrine may still be ex-
cludable under the claim of right doctrine. Put differently, the
claim of right doctrine provides a broader basis for exclusion
than the trust fund doctrine. Consider, for instance, commer-
cial loans, which confer an economic benefit on the recipient.
See Indianapolis Power, 493 U.S. at 208 (observing that a busi-
ness “presumably does not borrow money” unless it believes
it will profit). Despite that benefit—which would prohibit ex-
clusion under the trust fund doctrine—loans are excluded
from income. See id. at 208, 210. That’s because loans come
with a repayment obligation, which renders them excludable
under the claim of right doctrine. See id. Indeed, the Supreme
Court has explicitly rejected the idea that economic gains are
always taxable as income. Id. at 214 (“[A] taxpayer does not
realize taxable income from every event that improves his
economic condition.”). Rather, “the issue [of income] turns
10 No. 24-3239

upon the nature of the rights and obligations that [the tax-
payer] assumed” when he received the money. Id. at 209.
Applying these observations to the decision below, we
conclude that the tax court erred. It found that Fund income
was income to Hyatt solely because Hyatt directly benefited
from its use and thus failed to satisfy the trust fund doctrine.
But the claim of right doctrine offers another, broader, basis
to exclude income. The court therefore also should have con-
sidered Hyatt’s arguments under the claim of right doctrine.
The case relied upon by the tax court, Angelus Funeral
Home, 407 F.2d 210, doesn’t suggest otherwise. There, the
Ninth Circuit concluded that pre-funeral payments by indi-
viduals were income to a funeral home, in part because the
funeral home immediately benefited from those payments.
The tax court reads Angelus Funeral Home to support its notion
that a more-than-incidental benefit is sufficient to decide that
funds are income. But that reading disregards the substance
of the Ninth Circuit’s reasoning. The Ninth Circuit found not
just benefit to the taxpayer, but also that the taxpayer’s control
over the funds—its “absolute power to benefit itself,” using the
funds “whenever it wished, subject only to limitations of pur-
pose”—made it liable for taxation. Id. at 213 (emphasis
added).
Angelus Funeral Home thus doesn’t stand for the proposi-
tion that economic benefit alone is sufficient to make funds
income. Rather, the Ninth Circuit’s attention to taxpayer con-
trol over the funds adheres to the claim of right doctrine,
which focuses not on benefit but on “the parties’ rights and
obligations at the time the payments are made.” Indianapolis
Power, 493 U.S. at 211 (citation modified). Here, though the tax
court analyzed some aspects of Hyatt’s control over the Fund
No. 24-3239 11

as part of its benefits analysis, it stopped well short of finding
the kind of absolute power present in Angelus Funeral Home.
And it never directly considered whether the funds were ex-
cludable under the claim of right doctrine.
Nor are we persuaded by the IRS’s argument in support
of the tax court’s decision based on a line of cases that pre-
dates Indianapolis Power, beginning with Commissioner v. Wil-
cox, 327 U.S. 404 (1946), continuing with Rutkin v. United
States, 343 U.S. 130 (1952), and culminating with James, 366
U.S. 213. Those cases do not, as the IRS argues, repudiate use
of the claim of right doctrine to exclude income. In James, the
Court explicitly “passed” on deciding whether the claim of
right doctrine operated as a “touchstone of taxability,” indi-
cating that Wilcox and Rutkin didn’t resolve this question. 366
U.S. at 216 n.7. And later, the Court affirmed that income may
be excluded under the claim of right doctrine, applying the
formulation of the doctrine given in James. See Indianapolis
Power, 493 U.S. at 209.
To sum up: the trust fund doctrine is one (but not the only)
way to show that a taxpayer lacks a claim of right to the funds
at issue, and thus that they are not his income. 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.
Hyatt urges us to find that Fund income wasn’t its income
under the claim of right doctrine and reverse the tax court.
But the tax court never applied the claim of right test and, in
fact, explicitly declined to resolve issues relevant to that anal-
ysis, such as whether the Fund was subject to a legally en-
forceable use restriction. See id. (claim of right analysis
12 No. 24-3239

includes whether funds are received “without restriction as to
their disposition”); Skelly Oil Co., 394 U.S. at 680 (same). Be-
cause “we are a court of review, not first view,” the proper
course of action is therefore to return this case to the tax court
for it to apply the correct legal test. United States v. Dingwall, 6
F.4th 744, 762 (7th Cir. 2021) (Kirsch, J., concurring) (citation
modified); see Frank v. Gaos, 586 U.S. 485, 493 (2019) (per cu-
riam) (remanding for resolution by the courts below in the
first instance).
In a single sentence in its reply brief without further de-
velopment, Hyatt also urges that reversal is warranted be-
cause the IRS failed to argue in the alternative about the out-
come under the claim of right test. But an appellee’s failure to
brief an alternative ground for affirmance does not entitle the
appellant to an automatic reversal. See Pasha v. Gonzalez, 433
F.3d 530, 535 (7th Cir. 2005). We must still assess the merits of
the appeal, reversing only if the appeal is indeed meritorious.
Id. Here, as stated before, the appropriate course of action is
for the tax court to conduct the claim of right analysis in the
first instance. We therefore vacate the tax court’s decision and
remand with instructions for that court to determine whether
income to the Fund constituted income to Hyatt under the
claim of right doctrine.
B
We close with thoughts on the interpretation of the trading
stamp method as set forth in 26 C.F.R. § 1.451–4(a)(1). Strictly
speaking, we don’t need to reach this issue; the trading stamp
method only comes into play if Fund income was Hyatt’s in-
come, which the tax court must decide anew. Nonetheless, we
find it prudent to address the issue now, in the event that it
arises again on remand. See, e.g., Rodgers-Rouzier v. Am. Queen
No. 24-3239 13

Steamboat Operating Co., 104 F.4th 978, 991, 995 (7th Cir. 2024)
(adopting a similar approach); United States v. Leonard-Allen,
739 F.3d 948, 955–56 (7th Cir. 2013) (same).
Section 1.451–4(a)(1) states that accrual method taxpayers
issuing or selling trading stamps redeemable for “merchan-
dise, cash, or other property” are eligible to use the trading
stamp method to deduct related costs. To further define the
scope of “other property,” the tax court applied the canon of
ejusdem generis, which uses a common element among pre-
ceding terms to narrow a catch-all term. See Citizens Ins. Co. of
Am. v. Wynndalco Enters., LLC, 70 F.4th 987, 999–1000 (7th Cir.
2023) (defining the canon). As relevant here, the tax court rea-
soned that because merchandise and cash are both tangible,
“other property” must refer only to tangible property. And
since hotel stays and airlines miles are intangible, the court
concluded that Hyatt couldn’t use the trading stamp method.
Because we return this case to the tax court to decide
whether Fund income was Hyatt’s income at all, we need not
decide whether Hyatt may use the trading stamp method. We
observe only that the tax court erred when it interpreted
“other property” to mean tangible property.
Assuming, without deciding, that there is ambiguity as to
the meaning of “other property” such that application of
ejusdem generis was warranted, the tax court’s chosen
theme—tangibility—doesn’t work. See United States v. Tur-
kette, 452 U.S. 576, 581 (1981) (noting that ejusdem generis is
used only when there is uncertainty about meaning). Cash
isn’t always tangible; it refers to “[m]oney or its equivalent”
and “balances in bank accounts.” Cash, Black’s Law Diction-
ary (12th ed. 2024). And the potentially intangible nature of
cash is evident even from definitions contemporaneous to the
14 No. 24-3239

promulgation of § 1.451–4(a)(1) in 1972. See, e.g., Cash, Web-
ster’s Third New International Dictionary (1971) (defining
cash as, among other things, “bank deposits”). Nor are we
persuaded by the IRS’s arguments based on the surrounding
provisions of § 1.451–4(a)(1) and that regulation’s history.
Tangibility is not a common trait of cash and merchandise
that can narrow the meaning of “other property” when inter-
preting § 1.451–4(a)(1).
The tax court therefore erred when it concluded that Hyatt
couldn’t use the trading stamp method because “other prop-
erty” must be tangible. However, on remand the tax court has
the flexibility to consider other arguments regarding Hyatt’s
eligibility to use the trading stamp method, should that issue
arise.
VACATED AND REMANDED