No Deferral of Annual Cardholder Payments as Advance Payments for Services

In American Express, 8/23/01, the Federal Circuit affirmed that the IRS did not abuse its discretion by denying the taxpayer's request to change its accounting method for credit card annual fees. Under Rev. Proc. 71-21, American Express sought permission to defer the recognition of annual fees as income until services were performed, rather than when it received them. The Federal Circuit held that the Service reasonably interpreted the revenue procedure to exclude credit extension from the definition of services. The appeals court rejected the Tax Court's reasoning in Barnett Banks of Florida, 106 TC 103 (1996), and Signet Banking Corp., 106 TC 117 (1996), aff'd, 118 F3d 239 (4th Cir. 1997), which focused on the refundability of the fee and statements in cardholder agreements.

Some taxpayers have adopted the deferral method for credit card annual fees after changing from nonrefundable to refundable annual fees, taking the position that there is no change in method but rather a change in facts. Interestingly, a payment for the future extension of credit might be viewed as an option premium, which normally is deferred until lapse or exercise, or as prepaid interest spread gradually over a loan's term. Further, in Burbank Liquidating Corp., 39 TC 999 (1963), and Federal National Mortgage Ass'n, 100 TC 541 (1993), the Tax Court held that making loans was a service, although American Express gives the IRS wide latitude in defining services for Rev. Proc. 71-21 purposes.

From Dwight Mersereau, Washington, DC