SECTION 3. POSSIBLE

METHODOLOGY FOR DETERMINING REDUCTION IN SECTION 4261(a) TAX BASE

The Treasury Department and the IRS are considering an elective safe harbor methodology that a collector could use to reduce a taxpayer’s § 4261(a) tax base on purchased frequent flyer miles. Under the methodology, for each 12 month period beginning on April 1 and ending on March 31 (the “Election Year”), the tax base for frequent flyer miles purchased from a particular airline mileage awards program would be reduced based on redemption data from that airline mileage awards program for the calendar year immediately preceding the calendar year in which the Election Year begins (the “Base Period”).

The methodology would be based on the following data from the Base Period:

• Total number of frequent flyer miles redeemed under that program.

• Number of frequent flyer miles under that program redeemed for taxable air transportation.

• Number of frequent flyer miles redeemed under that program other than for taxable air transportation.

More specifically, for each specific airline mileage awards program (that is, on a per airline mileage awards program basis), a collector may reduce the tax base upon which the tax imposed by § 4261(a) is calculated by applying the following ratio:

i) The number of frequent flyer miles

under that program that the airline data shows were redeemed during the Base Period other than for taxable air transportation; over ii) The total number of frequent flyer

miles under that program that the airline data shows were redeemed during the Base Period.

The collector will multiply the amount paid for the right to provide frequent flyer miles under the program by the ratio determined above (the “Exclusion Ratio”) and will reduce the § 4261(a) tax base on the purchased frequent flyer miles by this amount. The Exclusion Ratio would apply for the entire Election Year.

Example . The following example illustrates this methodology:

On April 1, 2015, Company buys 5,000,000 frequent flyer miles from Airline X’s only mileage award program for $.01 per frequent flyer mile (for a total cost of $50,000). Under current law, if the § 4261(a) tax is calculated on the gross purchase of the frequent flyer miles, the tax due on the purchase will be $3,750 ($50,000 x 7.5%).

For the applicable Base Period (that is, January 1, 2014, through December 31, 2014), Airline X data indicates that frequent flyer miles were redeemed as noted in the table below:

Total Frequent Flyer

Frequent Flyer Miles Redeemed for Taxable Air Transportation

Frequent Flyer Miles Redeemed

Base Period Miles Redeemed Redeemed for Taxable Air Transportation for Non-Taxable Purposes

1/1/2014 - 12/31/2014 100,000,000 70,000,000 30,000,000

Base Period

Miles Redeemed

Following the methodology described above, Airline X may reduce Company’s tax base on the purchased frequent flyer miles as follows:

• Frequent flyer miles redeemed other than for taxable air transportation in the Base Period divided by total frequent

flyer miles redeemed in that period: 30,000,000 � 100,000,000 � 30%.

• Exclusion Ratio calculated in the previous step applied to the frequent flyer miles purchased on April 1, 2015: 30% x $50,000 amount paid for frequent flyer miles - § 4261(a) tax base reduction of $15,000. This

results in a § 4261(a) tax base of $35,000 ($50,000 less $15,000).

Therefore, under this methodology, the tax due on the April 1, 2015, purchase is $2,625 ($35,000 § 4261(a) tax base x 7.5%).

November 16, 2015 670 Bulletin No. 2015–46