Trust Fund Doctrine-Tax-Claim of Right Doctrine

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7^th Circuit Court of Appeals

Case Name: Hyatt Hotels Corporation & Subsidiaries v. CIR

Case No.: 24-3239

Officials: Kirsch, Jackson-Akiwumi, and Maldonado, Circuit Judges.

Focus: Trust Fund Doctrine-Tax-Claim of Right Doctrine

Hyatt Hotels Corporation operated a guest loyalty program financed by contributions from both company and independently owned Hyatt-branded hotels. The funds, which also included revenue from direct point sales and investment income, were pooled into a centralized account managed by Hyatt. When members redeemed their points, money from this fund was used to reimburse participating hotels and cover program expenses. The Internal Revenue Service (IRS) took the position that income entering the fund, from third-party contributions, point sales, and investments, should be treated as taxable income to Hyatt.

The United States Tax Court considered the IRS’s notice of deficiency and Hyatt’s challenge. Hyatt argued that the fund’s income should not be taxed as its own under the claim of right and trust fund doctrines. Alternatively, it contended that if the income were taxable, it should be allowed to apply the trading stamp method of accounting to offset that income with anticipated redemption costs. The Tax Court rejected these arguments, concluding that Hyatt exercised sufficient control and derived enough benefit from the fund to make the income taxable. The court also found that the trading stamp method did not apply because the rewards involved were not tangible goods.

The Seventh Circuit determined that the Tax Court’s analysis was incomplete. The court found that the lower court failed to properly evaluate whether the claim of right doctrine could independently justify excluding the fund’s income from Hyatt’s taxable income. Additionally, the court emphasized that this doctrine is broader than the trust fund doctrine and may apply even where the latter does not. The court vacated the Tax Court’s decision and remanded the case for further consideration of whether the income should be excluded under the claim of right doctrine.

Vacated and remanded.

Decided 04/22/26

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