IRS Expands Class of Taxpayers That Can Defer Advanced Payments for Gift Cards.
(Parker's Federal Tax Bulletin: August 1, 2013)

A new revenue procedure allows a taxpayer to defer recognizing in gross income certain advance payments received from the sale of gift cards that are redeemable for goods or services by an unrelated entity. Rev. Proc. 2013-29.

Rev. Proc. 2004-34 allows taxpayers a limited deferral beyond the tax year of receipt for certain advance payments. Qualifying taxpayers generally may defer to the next succeeding tax year the inclusion in taxable income of advance payments to the extent they are not recognized in book income in the year received. Likewise, an accrual method taxpayer that receives an advance payment for goods or services must include the advance payment in gross income in the tax year of receipt to the extent recognized in revenues in the taxpayer's applicable financial statement for that tax year. For a taxpayer without an applicable financial statement, an advance payment must be included in gross income to the extent earned in the tax year of receipt. Rev. Proc. 2011-18 subsequently modified Rev. Proc. 2004-34 by allowing taxpayers to defer recognizing in gross income advance payments received from the sale of gift cards that are redeemable for goods or services of the taxpayer or a third party.

To qualify as an advance payment eligible for deferral, the payment must be recognized by the taxpayer (in whole or part) in revenues in its applicable financial statement for a subsequent tax year, or, for taxpayers without an applicable statement, the payment must be earned by the taxpayer (in whole or part) in a subsequent tax year. However, if a gift card is redeemed by an unrelated entity whose financial statement revenues are not consolidated with the taxpayer's revenues on the taxpayer's applicable financial statement, the taxpayer will never recognize any portion of the gift card sale proceeds in revenues in its applicable financial statement because that revenue is accounted for only by the unrelated redeeming entity upon the sale of goods or services. Similarly, for a taxpayer without an applicable financial statement, the payment is never earned by the taxpayer because the payment is earned by the unrelated redeeming entity.

According to the IRS, a taxpayer should not be precluded from using the deferral method of accounting solely because the taxpayer never recognizes in revenues in its applicable financial statement payments from an eligible gift card sale, or, for taxpayers without an applicable financial statement, never earns payments from an eligible gift card sale.

As a result, the IRS issued Rev. Proc. 2013-29, in which it allows taxpayers to defer recognizing in gross income certain advance payments received from the sale of gift cards that are redeemable for goods or services by an unrelated entity. The new procedure modifies the term eligible gift card to provide that an eligible gift card sale is the sale of a gift card (or gift certificate) if: (1) the taxpayer is primarily liable to the customer (or holder of the gift card) for the value of the card until redemption or expiration, and (2) the gift card is redeemable by the taxpayer or by any other entity that is legally obligated to the taxpayer to accept the gift card from a customer as payment for items that qualify for deferral in Rev. Proc. 2004-34. If a gift card is redeemable by an entity whose financial results are not included in the taxpayer's applicable financial statement, a payment will be treated as recognized by the taxpayer in revenues in its applicable financial statement to the extent the gift card is redeemed by the entity during the tax year. For a taxpayer without an applicable financial statement, if a gift card is redeemable by an entity eligible for deferral treatment under Rev. Proc. 2004-34, including an entity whose financial results are not included in the taxpayer's financial statement, a payment will be treated as earned by the taxpayer to the extent the gift card is redeemed by the entity during the tax year.

Rev. Proc. 2013-29 is effective for tax years ending on or after December 31, 2010.

For a discussion of the deferral of income from advance payments to accrual taxpayers, see Parker Tax ¶241,520.

Parker Tax Publishing Staff Writers

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