SECTION 3. MODIFICATIONS TO

REV. PROC. 2004–34

.01 Section 4.01(3) of Rev. Proc. 2004–34 is modified to revise paragraph (h), revise paragraph (i) and redesignate it as paragraph (j), and add a new paragraph (i). As modified, the provisions read as follows:

.01 Advance Payment . Except as provided in section 4.02 of this revenue procedure, a payment received by a taxpayer is an “advance payment” if —

2011–5 I.R.B. 444 January 31, 2011

of the gift cards is $100,000. In the consolidated group’s applicable financial statement, the group recognizes revenue from the sale of a gift card when the gift card is redeemed. W tracks sales and redemptions of gift cards electronically, is able to determine the extent to which advance payments are recognized in revenues in its consolidated applicable financial statement for the taxable year of receipt, and meets the requirements of section 5.02(1)(b)(i) of this revenue procedure. The payments W receives from the sale of gift cards are advance payments because they are payments for eligible gift card sales under section 4.01(3)(i) of this revenue procedure and meet the requirements of sections 4.01(1) and (2). Thus, W is eligible to use the Deferral Method. At the end of Year 1, W recognizes $800,000 in income in its consolidated applicable financial statement. Under the Deferral Method, W must include $800,000 of the payments from gift card sales in gross income in Year 1 and the remaining $100,000 of the payments in gross income in Year 2.

Example 24 . W is a Subchapter S corporation that operates an affiliated restaurant corporation and manages other affiliated restaurants. These other restaurants are owned by other Subchapter S corporations, partnerships, and limited liability companies. W has a partnership interest or an equity interest in some of the restaurants. W administers a gift card program for participating restaurants. Each participating restaurant operates under a different trade name. Under the gift card program, W and each of the participating restaurants sell gift cards, which are issued with W ’s brand name and are redeemable at all participating restaurants. Participating restaurants sell the gift cards to customers and remit the proceeds to W . W is primarily liable to the customer for the value of the gift card until redemption, and the participating restaurants are obligated under an agreement with W to accept the gift card as payment for food, beverages, taxes, and gratuities. When a customer uses a gift card to make a purchase at a participating restaurant, W is obligated to reimburse that restaurant for the amount of the purchase, up to the total gift card value. In W ’s applicable financial statement, W recognizes revenue from the sale of a gift card when a gift card is redeemed at a participating restaurant. W tracks sales and redemptions of gift cards electronically, is able to determine the extent to which advance payments are recognized in revenues in its applicable financial statement for the taxable year of receipt, and meets the requirements of section 5.02(1)(b)(i) of this revenue procedure. The payments W receives from the sale of gift cards are advance payments because they are payments for eligible gift card sales under section 4.01(3)(i) of this revenue procedure and meet the requirements of sections 4.01(1) and (2). Thus, W is eligible to use the Deferral Method.

Example 25 . X is a corporation that operates for the benefit of its franchisee members, who own and operate domestic and international individual member hotels. X collects membership fees from the member hotels in exchange for providing a wide variety of management support services, which include making reservations for customers at the various member hotels. X also administers a gift card program for its members by selling gift cards that may be redeemed for hotel rooms and food or beverages provided by any member hotel. The agreements underlying the gift card program provide that X is

entitled to the proceeds from the sale of the gift cards, must reimburse the member hotel for the value of a gift card redeemed, and until redemption remains primarily liable to the customer for the value of the card. In X ’s applicable financial statement, X recognizes payments from the sale of a gift card when the card is redeemed. X tracks sales and redemptions of gift cards electronically, is able to determine the extent to which advance payments are recognized in revenues in its applicable financial statement for the taxable year of receipt, and meets the requirements of section 5.02(1)(b)(i) of this revenue procedure. The payments X receives from the sale of gift cards are advance payments because they are payments for eligible gift card sales under section 4.01(3)(i) of this revenue procedure and meet the requirements of sections 4.01(1) and (2). Thus, X is eligible to use the Deferral Method.