SECTION 8. AUDIT PROTECTION

If a taxpayer within the scope of this revenue procedure used a method of accounting permitted by section 4 of this revenue procedure in a taxable year ending before December 31, 2010, the Service will not challenge the use of that method of accounting. Moreover, if the use by a taxpayer within the scope of this revenue procedure of a method of accounting permitted by section 4 of this revenue procedure is an issue under consideration in an examination, in appeals, or before the U.S. Tax Court, the Service will not further pursue the issue.

DRAFTING INFORMATION

The principal author of this revenue procedure is Sean M. Dwyer of the Office

January 31, 2011 443 2011–5 I.R.B.

• • (3) the payment is for —
• • (h) memberships in an organization (other than memberships for which an election under § 456 is in effect);

(i) an eligible gift card sale; or (j) any combination of items described in subparagraphs (a) through

(i) of this section 4.01(3).

• • .02 Section 4 of Rev. Proc. 2004–34 is modified to add new sections 4.07 and 4.08 to read as follows: .07 Eligible Gift Card Sale . An eligible gift card sale is the sale of a gift card (or gift certificate) if: (1) the taxpayer is primarily liable to the customer (or holder of the gift card) for the value of the card until redemption or expiration, and (2) the gift card is redeemable by the taxpayer or by any other entity that is legally obligated to the taxpayer to accept the gift card from a customer as payment for items listed in sections 4.01(3)(a)-(j) of this revenue procedure;

.08 Financial Statement for Consoli- dated Group Members . If the taxpayer is a member of an affiliated group of corporations that files a consolidated return for federal income tax purposes, the group’s financial statement (as defined in section 4.06 of this revenue procedure) is a financial statement of the taxpayer.

.03 Section 5.03 of Rev. Proc. 2004–34 is modified to add the following new Examples 23, 24, and 25 to read as follows:

Example 23 . R corporation operates department stores. U corporation, V corporation, and W corporation are wholly owned domestic subsidiaries of R that file a consolidated federal income tax return with R . X corporation is a controlled foreign subsidiary of R that is prohibited from filing a consolidated return with R . U sells Brand A goods, V sells Brand B goods, X sells Brand C goods, and Z is an unrelated entity that sells Brand D goods. W administers a gift card program for the R consolidated group, X, and Z . Pursuant to the underlying agreements, W issues gift cards that are redeemable for goods or services offered by U, V, X, and Z . In addition, U, V, X, and Z sell gift cards to customers on behalf of W and remit amounts received to W . The agreements provide that W is primarily liable to the customer for the value of the gift card until redemption, and U, V, X, and Z are obligated to accept the gift card as payment for goods or services. When a customer purchases goods or services with a gift card at U, V, X, or Z, W reimburses that entity for the sales price of the goods or services purchased with the gift card, up to the total gift card value. In Year 1, W sells gift cards with a total value of $900,000, and, at the end of Year 1, the unredeemed balance

.04 Rev. Proc. 2004–34 provides a “deferral method” of accounting that allows an accrual method taxpayer receiving advance payments for goods or services to defer recognizing income to the extent the taxpayer defers recognizing the payments as revenues in its “applicable financial statement.” If the taxpayer does not include advance payments as revenues in its applicable financial statement in the year of receipt, the taxpayer must include the advance payments in gross income in the next succeeding taxable year.

.05 The manner in which retailers market, sell to customers, and redeem (that is, accept as payment for goods or services) gift cards has evolved over time. Historically, a single retailer would sell a gift certificate or gift card to a buyer and would redeem the card or certificate itself by providing goods or services to the holder. Under Rev. Proc. 2004–34, the retailer could defer recognizing the advance payment from the sale of the gift card. Today, however, gift cards are commonly sold by one retailer and redeemed either by that retailer or by others (related or unrelated to the selling entity) under a gift card service agreement.

.06 A taxpayer that sells gift cards (gift card entity) typically operates its gift card program under a service agreement with participating merchants. For example:

porations may establish a gift card subsidiary to sell gift cards that may be redeemed for goods or services provided by the gift card subsidiary or other members of the affiliated group;

tive, not-for-profit membership organization, or franchisee may sell gift cards that may be redeemed for goods or services provided by independently-owned franchisees or members;

may sell gift cards that may be redeemed by participating restaurants in different geographic locations or with different trade names; or

may be redeemed for merchandise at the retailer’s stores, retail stores operated by a related party, or retail stores operated by unrelated parties.

.07 Although gift card entity structures and gift card service agreements can vary widely, it is common for a gift card entity to receive and hold the proceeds from gift card sales until a customer uses the card to purchase merchandise or services. If a customer uses a gift card to purchase merchandise or services from a participating merchant, the participating merchant is obligated to accept the gift card as payment for its goods or services and the gift card entity is obligated to reimburse the participating merchant for the sales price of the goods or services purchased with the gift card. Under the terms of a typical gift card service agreement, the gift card entity is primarily liable to the customer for the value of the gift card until the card expires or is redeemed.

.08 The Service and the Treasury Department have concluded that, provided the other requirements of Rev. Proc. 2004–34 are met, a taxpayer that sells gift cards redeemable through other entities should be treated the same as a taxpayer that sells gift cards redeemable only by that taxpayer. Accordingly, this revenue procedure modifies the definition of advance payments in Rev. Proc. 2004–34 to allow deferral of advance payments received under additional types of gift card arrangements. This revenue procedure, however, does not modify § 1.451–5 to allow deferral of advance payments received under additional types of gift card arrangements. Section 1.451–5 applies only to “an agreement for the sale or other disposition in a future taxable year of goods held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” Goods provided by entities other than the taxpayer issuing the gift card are not “held by the taxpayer” for sale as required by § 1.451–5.