On July 24, 2013, the Treasury and IRS announced Rev. Proc. 2013-39, clarifying earlier guidance on deferral income from the sale of gift cards between a taxpayer and unrelated parties.
Under Rev. Proc. 2004-34, qualifying taxpayers generally may defer to the next succeeding taxable year the inclusion in gross income for federal income tax purposes of advance payments (i.e. gift cards) to the extent the advance payments are not recognized in revenues (or, in certain cases, are not earned) in the taxable year of receipt, but which are recognized as revenue in some future year for financial reporting purposes. A single retailer who sells and redeems its own gift cards would be qualified to use this deferral method.
However, many gifts cards are frequently sold and redeemed by a retailer and other related and unrelated parties and in those cases, the revenue from the gfit card redeemed with an unrelated party is not ever recognized as revenue in the recipient's financial statements. With both Treasury and IRS acknowledging current business environment, Rev. Proc. 2011-18 was issued to allow taxpayers with such agreements to use the deferral income method. Inadvertently, taxpayers with gift cards service agreements with unrelated parties would not have been ablel to use the deferral income method under Rev. Proc. 2011-18. As a result, the AICPA submitted a comment letter on July 18, 2012.
The AICPA, in the letter, pointed out that despite the Treasury’s intent to make the deferral income method available to all entities, the 2011 guidance precluded a taxpayer with gift cards service agreement with a financially unrelated party to use the deferral income method. We noted that Section 4.01(2) of Rev. Proc. 2004-34 was not properly modified to carry out their intent and we recommended necessary changes to correct this unintentional oversight.
The AICPA is pleased to announce that our comment led to Rev. Proc. 2013-39 which modified and clarified the deferral income rules for gift cards for unrelated parties when no other organization raised the issue before the Treasury and IRS.