SECTION 4. APPLICATION

.01 In general . A taxpayer within the scope of this revenue procedure may treat the issuance of a gift card in exchange for returned goods as (1) the payment of a cash refund in the amount of the gift card, and (2) the sale of a gift card in the amount of the gift card. The taxpayer may account for the amount deemed received for the sale of the gift card under § 1.451–5 or Rev. Proc. 2004–34, if otherwise eligible.

.02 Gift cards . For purposes of this revenue procedure, a gift card is any evidence of a promise to provide a specific dollar amount of goods and/or services to a customer in a future sale, whether imprinted electronically on a plastic card, issued electronically with a special code, provided as a printed certificate, or recorded on a taxpayer’s books. A card or other evidence of a promise to provide a specific dollar amount of goods and/or services is not a gift card for purposes of this revenue procedure if the customer must perform any act or service in addition to presenting the card, such as purchasing additional

events have occurred that fix the right to receive the income and the amount can be determined with reasonable accuracy. All the events that fix the right to receive income generally occur when (1) the taxpayer earns the payment through performance, (2) payment is due to the taxpayer, or (3) the taxpayer receives the payment, whichever happens first. See Rev. Rul. 84–31, 1984–1 C.B. 127. .02 A taxpayer generally must recognize advance payments in income in the year of receipt, because receipt satisfies the all events test of § 1.451–1(a). However deferral beyond the year of receipt is permitted in two situations.

(1) Section 1.451–5 generally allows an accrual method taxpayer to defer recognizing advance payments for goods as income until the taxable year the taxpayer recognizes the advance payments in revenue under the taxpayer’s method of accounting for financial reporting purposes. However, § 1.451–5(c) limits deferral of substantial advance payments for inventoriable goods to the end of the second taxable year following the year the taxpayer receives the payments.

(2) Rev. Proc. 2004–34, 2004–1 C.B. 991, generally allows an accrual method taxpayer to defer recognizing advance payments received for goods, services, or a mixture of goods and services as income until the taxable year the taxpayer recognizes the advance payments in revenue under the taxpayer’s method of accounting for financial reporting purposes. However, section 5.02(1)(a)(ii) of Rev. Proc. 2004–34 limits the deferral to the end of the next succeeding taxable year following the year the taxpayer receives the payments.

.03 Section 461(a) provides that a taxpayer takes a deduction or credit in the taxable year that is the proper taxable year under the method of accounting used in computing taxable income. Section 1.461–1(a)(2)(i) provides that, under an accrual method of accounting, a liability (as defined in § 1.446–1(c)(1)(ii)(B)) is incurred, and generally is taken into account for federal income tax purposes, in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred. Section 1.461–4(g)(3) provides that economic

performance occurs for a refund liability when the refund is paid (whether paid in property, money, or a reduction in the price of goods or services to be provided in the future). Section 1.461–4(g)(3) generally applies to refund liabilities regardless of whether they are characterized as deductions from gross income, adjustments to gross receipts or total sales, or adjustments or additions to cost of goods sold. Thus, for federal income tax purposes, refunds reducing gross receipts generally are incurred when paid. Sections 1.61–3(a) and 1.446–1(c)(1)(ii)(B). .04 Taxpayers (merchants) commonly handle returns of inventoriable goods in one of two ways. The merchant may give the customer a cash refund in exchange for the returned goods, or the merchant may issue a credit, for example in the form of a gift card, to the customer for the returned goods.

(1) A taxpayer that pays a customer an immediate cash refund for returned goods has incurred a refund liability. The payment satisfies the requirements of § 1.461–1(a)(2)(i) (including economic performance), therefore the taxpayer may reduce gross receipts for the amount of the refund. If the customer uses the refund to purchase a gift card, the taxpayer has received an advance payment from the sale of a gift card. The taxpayer may defer the proceeds of this sale under a method of accounting that complies with either § 1.451–5 or Rev. Proc. 2004–34.

(2) A taxpayer that, instead of paying a cash refund, only will issue a gift card to a customer in exchange for returned goods does not have a fixed liability under § 1.461–1(a)(2)(i) because it is conditioned on the future redemption of the gift card.

.05 Many commentators in the retail industry contend that cash refunds and gift cards provided as refunds for returned goods should be treated the same. The commentators argue that issuing a gift card for returned goods is tantamount to making a cash refund that the customer immediately uses to purchase a gift card. To avoid disputes about the proper characterization of gift cards issued for returned goods, provide better matching of income and costs, and simplify recordkeeping, the Internal Revenue Service will permit a taxpayer within the scope of this revenue procedure to treat gift cards issued for

2011–5 I.R.B. 442 January 31, 2011

of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure, contact Mr. Dwyer at (202) 622–5020 (not a toll-free number).

26 CFR 601.204: Changes in accounting periods and in methods of accounting. (Also Part 1: §§ 446, 451; 1.446–1, 1.451–1.)

Rev. Proc. 2011–18