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IRS Issues Second Directive on Gift Cards

The IRS has issued a second industry director directive on gift cards and gift certificates, elevating the use of a separate gift card company to administer a taxpayer’s gift card or certificate program.

January 2009
by Jane Rohrs/The Tax Adviser

IDD No. 1 (LMSB-04-0507-039), issued on May 23, 2007, classified gift card “variations and problems” into two categories, Part A and Part B. Part A includes compliance with regulations, accounting method changes, and the use of estimates. Part A concerns must be raised on examination, and contact must be made with a Food and Beverage or a Retail technical adviser for coordination of the issue.

Planning and Examination Guidance: Part A

DD No. 2 states that the question of a taxpayer’s use of a separate legal entity to administer its gift card or certificate program is now elevated to Part A status and accorded Part A treatment. The primary concern is whether the entity has goods for sale in the ordinary course of its trade or business and is therefore eligible to elect a deferral method of reporting gift card income under Regs. Sec. 1.451-5 or Rev. Proc. 2004-34.

The directive refers examiners to field attorney advice (FAA) 20082801F, released on July 11, 2008, which provides a legal analysis of a specific case.

Planning and Examination Guidance: Part B

In addition to elevating the Giftco matter to Part A status, the IRS has also updated the issues under Part B in a question and answer format. Part B covers the following topics:

Gift cards versus gift certificates: The IRS explains that gift cards and gift certificates are the same for purposes of Regs. Sec. 1.451-5. If a taxpayer treats gift cards differently from gift certificates, the IRS advises an examiner to raise the issue with one of the Retail or Food and Beverage technical advisers.

Reloadable gift cards: If a taxpayer’s gift cards are reloadable, the IRS tells examiners to verify that the taxpayer’s accounting system and software take into account the actual dates when money is added to the card for purposes of income deferral.

Deposits: The IRS takes the position that gift card or certificate income is not a deposit that is excludible from income. If a taxpayer excludes from taxable income gift card or certificate proceeds as deposits, the IRS advises examiners to bring the issue to the attention of one of the Retail or Food and Beverage technical advisers.

Gift cards as refunds: The IRS is still formulating a position on whether a taxpayer may treat the issuance of a gift card for returned merchandise, in lieu of a cash refund, as equivalent to a sale of a gift card but indicates that a Retail or Food and Beverage technical adviser should be contacted in such cases.

This article was excerpted from The Tax Adviser. View the full article here (PDF).

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