The IRS recently issued a technical advice memorandum (TAM 201610017) advising that taxpayers can
potentially defer recognition of the portion of advanced payments
related to goods from the sale of unredeemed gift cards for two
years under Treas. Reg. Sec. 1.451-5 even if some other portion of
payments may relate to “non-integral” services. This
applies as long as taxpayers can reasonably allocate the amount
allocable to goods.
Generally, accrual method taxpayers must include advanced payments
from gift card sales in the year of receipt. However, Treas. Reg.
Sec. 1.451-5 allows for a two-year deferral for advance payments
related to the sale of goods when the payments are not recognized
for financial accounting purposes, even if the payment is made for
gift cards. However, this longer deferral period would not apply to
an amount allocable to non-integral services, because this is not
covered under Treas. Reg. Sec. 1.451-5, and instead, could be
included in gross income under Section 451(a).
In the TAM, the taxpayer was a large retailer selling products
— as well as delivery, installation, repair and other
services that weren’t necessarily connected to its own
products — out of its retail store. The taxpayer also sold
gift cards. The bearer of a gift card could choose when and which
items — either goods, services or a combination thereof
— could be redeemed by using the card. As such, the IRS said,
an amount cannot be properly allocated to the provision of goods
under the language of Treas. Reg. Sec. 1.451-5(a)(3) as of the end
of the year, because it is unknown what the card will be redeemed
for.
However, the IRS also reasoned that the totality of the
taxpayer’s outstanding gift cards should be considered as a
single agreement. In that case a process similar to the one in
Treas. Reg. Sec. 1.451-5(a)(3) for estimating amounts properly
allocable to the sale of goods and integral services and the amount
not allocable for these gift cards representing a future sale can
apply when the gift card has not been redeemed. No estimation
methodology was proposed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.