SECTION 2. BACKGROUND

.01 The sale of gift cards and gift certificates is a widespread business practice in many industries, especially retail. For income tax purposes, payment for a gift certificate or gift card is viewed as payment for goods or services to be provided in the future.

.02 In general, amounts received by an accrual method taxpayer for goods or services to be provided in the future (advance payments) must be included in gross income in the taxable year of receipt. See § 451; Schlude v. Commissioner, 372 U.S. 128 (1963); Rev. Rul. 84–31, 1984–1 C.B. 127. Two exceptions to this general rule are provided by § 1.451–5 of the Income Tax Regulations and Rev. Proc. 2004–34.

.03 Section 1.451–5 generally allows accrual method taxpayers a limited deferral for advance payments received for the sale of goods. The taxpayer may defer recognition of this income until the taxable year that the payments are recognized in revenues under the taxpayer’s method of accounting for financial reporting purposes. However, § 1.451–5(c) provides that a taxpayer generally may not defer advance payments for inventoriable goods beyond the end of the second taxable year following the year the taxpayer receives substantial advance payments.

products, to obtain the goods and/or services.