DOJ asks Seventh Circuit to rehear Hyatt loyalty fund income ruling

Hyatt Hotels Corp. v. Commissioner. United States Court of Appeals for the Seventh Circuit. No. 24-3239. 2026.

The DOJ wants the Seventh Circuit to reverse a ruling that favors taxpayers. This ruling could let taxpayers claim that money they control is not income just because they deny having a claim of right to it.

Holding

The DOJ asked for a new hearing after the Seventh Circuit said the claim of right doctrine could be used to exclude certain payments from income. The court sent Hyatt’s loyalty fund case back to the Tax Court.

Why It Matters

• This is consequential because the government frames the panel decision as a threat to the basic definition of gross income under §61.

• The petition argues that the claim-of-right doctrine is a rule of income inclusion, not a taxpayer election to exclude controlled receipts from income.

• The dispute matters beyond Hyatt because many businesses receive and administer funds tied to customer programs, vendor arrangements, rebates, deposits, or restricted-use accounts.

• The government’s concern is administrative. If the panel decision stands, taxpayers may try to avoid income recognition by denying a claim of right while still controlling and benefiting from the funds.

Key Facts

The IRS issued Hyatt a notice of deficiency asserting an additional $70 million in corporate income tax for the years between 2005 and 2012.

The deficiencies arose from payments made into a fund used to administer Hyatt’s Gold Passport customer loyalty program. Most payments came from third-party hotel owners.

Hyatt administered the fund. The IRS determined that Hyatt improperly omitted those payments from income.

The Tax Court addressed three issues:

• whether payments into the fund were income to Hyatt

• whether the IRS could make an accounting adjustment based on Hyatt’s earlier omission of that income

• whether Hyatt could use a Treasury regulation to reduce the amount it had to include in income

The Tax Court ruled for the Commissioner on the income inclusion and regulation issues. It ruled against the Commissioner on the accounting adjustment issue.

Hyatt appealed. The Seventh Circuit did not resolve the Tax Court’s analysis of the trust fund doctrine. It instead held that the claim of right doctrine may provide an independent and broader basis for income exclusion.

The panel remanded the case to the Tax Court to consider whether the fund payments were income to Hyatt under the claim-of-right doctrine.

Statutory or Regulatory Framework

Section 61 defines gross income broadly as all income from whatever source derived. The claim of right doctrine generally requires inclusion of income when a taxpayer receives earnings under a claim of right and without restriction on disposition, even if the taxpayer may later have to repay the money.

The trust fund doctrine can exclude funds from income when a taxpayer merely holds funds for another party and lacks beneficial ownership. The DOJ’s petition treats that doctrine as a narrow exclusion and argues that the panel’s claim-of-right analysis would make it largely unnecessary.

Arguments

Taxpayer argued:

• Hyatt did not have to include the loyalty fund payments in income.

• The claim of right doctrine provided an independent basis for excluding the payments.

• The fund payments should not be treated as Hyatt’s income if Hyatt lacked the required claim of right over the money.

Government argued:

• The claim of right doctrine is a rule of inclusion.

• Failure to satisfy the claim-of-right test does not automatically exclude a receipt from income.

• The panel's decision conflicts with Supreme Court precedent that broadly defines income.

• Indianapolis Power did not convert the claim-of-right doctrine into an exclusionary rule.

• The decision would allow taxpayers to control and benefit from funds while denying income treatment by disclaiming a claim of right.

Court’s Reasoning

The petition challenges the panel’s reasoning. It does not announce a new Court ruling.

The DOJ makes these points:

• The claim-of-right doctrine identifies one situation in which a taxpayer must include disputed receipts in income for the year of receipt.

• The doctrine does not define the outer boundary of income.

• The panel allegedly confused a sufficient condition for income inclusion with a necessary condition for income recognition.

• The DOJ argues that the panel revived the error of Commissioner v. Wilcox, which treated the presence of a claim of right as a condition for taxable income.

• The DOJ argues that James v. United States rejected that approach by overruling Wilcox and holding that unlawful gains can constitute taxable income even absent a bona fide claim of right.

• The DOJ contends that Indianapolis Power turned on dominion and an obligation to repay customer deposits, rather than on an exclusionary version of the claim-of-right doctrine.

• The DOJ argues that the panel's decision could weaken broader income principles grounded in control, dominion, and readily realizable economic value.

Result

The DOJ wants the Seventh Circuit to rehear the case, cancel the panel’s decision, and not allow the claim of right doctrine to be used as a way to exclude income.

The Takeaway

Tax professionals should see this as an important case about gross income, not just a loyalty program issue. The main question is whether the Seventh Circuit will let the claim of right doctrine become a broader way for taxpayers to exclude income when they handle disputed or restricted funds.

List of Citations

• §61: Defines gross income broadly as income from whatever source derived.

• Hyatt Hotels Corp. v. Commissioner, 174 F.4th 535: Seventh Circuit panel decision that the DOJ seeks to rehear.

• James v. United States, 366 U.S. 213: Central Supreme Court authority cited by the DOJ for the broad definition of income and the rejection of Wilcox.

• Commissioner v. Wilcox, 327 U.S. 404: Overruled case that treated claim of right as a condition for taxable income.

• Rutkin v. United States, 343 U.S. 130: Supreme Court case holding that unlawful gains are taxable income when the taxpayer has control and economic value.

• Commissioner v. Glenshaw Glass Co., 348 U.S. 426: Foundational case defining income as undeniable accessions to wealth, clearly realized, over which the taxpayer has complete dominion.

• Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203: Customer deposit case that the panel relied on and that the DOJ argues the panel misread.

• United States v. Skelly Oil Co., 394 U.S. 678: States the classic claim-of-right formulation and ties it to annual accounting.

• North American Oil Consolidated v. Burnet, 286 U.S. 417: Original claim-of-right case requiring inclusion of income in the year of receipt despite ongoing entitlement litigation.

• Healy v. Commissioner, 347 U.S. 278: Applies the claim-of-right doctrine to salary received without restriction, even though a later repayment liability arose.

• Macias v. Commissioner, 255 F.2d 23: Seventh Circuit authority cited by DOJ as rejecting claim of right as an exclusion doctrine.

• Commissioner v. Schleier, 515 U.S. 323: Cited for the sweeping scope of gross income.