Hyatt Wins Loyalty Program Tax Fight That Could Save $589 Million — While Members Pay More Points For Free Nights

In 2023 Hyatt lost a tax court case over its loyalty program with hundreds of millions of dollars on the line. They had argued that frequent guest program revenue wasn’t income. They’re just holding the money for hotels, so the money isn’t even theirs to tax. The IRS wasn’t buying it.

• Hyatt takes in the money, for instance when a member of the program stays at a hotel the hotel pays in.
  
• Hyatt then pays out to hotels for free room nights
  
• They don’t even intend to make a profit on the program fund.

The litigation dates to an IRS audit from just after Hyatt introduced its first credit card from Chase which was 2010. However last month they won a significant Seventh Circuit Court of Appeals decision that has wide-ranging implications for loyalty program economics.

$589 million is at stake for Hyatt. The case is over their tax returns up through 2011, and their returns since 2012 are in doubt pending this litigation. Right now it’s raining money for World of Hyatt, just as they’re squeezing members with systematic program devaluation.

• It strikes me that, thanks to the Seventh Circuit, Hyatt is about to be half a billion dollars better off for its overall loyalty program economics – right as they’re squeezing members with award price increases up to 67% on May 20th to cut costs.

• Hyatt also just got a big shot in the arm to the economics of its loyalty program with its Chase co-brand card deal renewal. In November 2025, Hyatt disclosed that its expanded Chase relationship was expected to produce an incremental $50 million in 2025, $90 million in 2026, and $105 million in 2027.

The case is over the federal income tax treatment of Hyatt’s old Gold Passport loyalty program fund for tax years 2009 – 2011. Hyatt had basically ignored the program fund for tax purposes since 1987. Hyatt argues that program fund revenue wasn’t Hyatt’s taxable income, but if it was they could use the trading stamp method to deduct estimated future redemption costs at the same time that points are issued rather than waiting until free nights get redeemed.

The IRS disagreed because Hyatt had too much control over redemptions and gain too much economic benefit from the program to be considered a mere conduit between hotels. While they had only audited 3 tax years, they treated 2009 as including a $228 million adjustment to cover 1987 – 2004. Hyatt sued. Tax Court held:

1. The program fund was includible in Hyatt’s gross income. It wasn’t a trust fund because Hyatt received more than incidental benefit from the Fund.
   
2. The IRS couldn’t go all the way back to 1987 – 2004.
   
3. With program fund revenue includable for tax purposes, Hyatt could not use the trading stamp method and deduct future redemption expenses at the time points were issued. The tax court said free hotel stays were not “merchandise, cash, or other property” because “other property” meant tangible items.

The Seventh Circuit, though, disagreed almost entirely. Just because Hyatt benefited from holding the program fund didn’t mean it wasn’t a trust fund excludable from income. Loans improve your economic position, but the proceeds aren’t income because of the obligation to repay.

They sent the case back to the tax court to determine whether the program fund was subject to a legally enforceable use restriction, and whether Hyatt had a claim to the money.

And the appeals court rejected the tax court’s reason for denying use of the trading stamp method. It said tangibility is not a valid common trait of “merchandise” and “cash,” since cash can include intangible bank account balances, so the requirement that all such items be tangible is wrong.

So the tax court now has to evaluate Hyatt’s actual control of the fund. If they do control it, then they have to decide whether Hyatt gets to deduct future redemptions at time of points issuance, now that they can’t say those redemptions don’t count because they’re intangible.

Hyatt becomes highly likely to win, and it matters becasue their 2012 – 2020 tax years remain open pending the outcome of this case and tax years 2021 – 2023 are under IRS field exam. They’ve said the total amount at issue for 2012 to present is $361 million, on top of the case itself.

Other loyalty programs structured the same way now may want to aggressively write off future redemptions at the time of points accrual, and those that already do are on firmer ground. The Seventh Circuit didn’t fully endorse it, but they rejected a narrow reading of what’s eligible. And the Seventh Circuit decision isn’t binding in jurisdictions.