Tier II Issue – Interchange and Merchant Discount Fees Directive #2
LB&I Control No: LB&I-4-1110-030
Impacted IRM 4.51.5
November 22, 2010
|MEMORANDUM FOR:||INDUSTRY DIRECTORS
DIRECTOR, FIELD SPECIALISTS
DIRECTOR, PREFILING AND TECHNICAL GUIDANCE
DIRECTOR OF REPORTING COMPLIANCE, SBSE
|FROM:||Walter L. Harris /s/ Walter L. Harris
Industry Director, Financial Services
|SUBJECT:||Tier II Issue – Interchange and Merchant Discount Fees Directive #2|
This Directive #2 provides field direction on the Tier II issue, Interchange and Merchant Discount Fees, and supplements Directive #1 issued on April 22, 2008. The Issue Owner Executive (IOE) is Bryan Inoue, Director, Field Operations - East, Financial Services.
Directive #2 is based upon Chief Counsel Notice CC-2010-018 (September 27, 2010), a copy of which is attached. The Chief Counsel Notice provides guidance concerning a change in litigating position to be followed for interchange fee income earned by issuers of credit cards, as a result of the Tax Court’s decision in Capital One Financial Corporation and Subsidiaries v. Commissioner, 133 T.C. No. 8 (September 21, 2009).
Capital One addressed, among other issues, whether interchange fee income earned in connection with a credit card transaction by an issuer of credit cards creates or increases original issue discount (OID) on a pool of loans to which the fees relate, with the interchange fee income then recognized over time under §1272(a)(6)(C)(iii).
Planning and Examination Guidance
Pursuant to the Chief Counsel Notice, LB&I will no longer challenge the issue of whether interchange fee income earned in connection with a credit card transaction by an issuer of credit cards creates or increases OID on a pool of credit card loans.
However, certain other issues addressed by Directive #1 but not addressed and resolved by the Chief Counsel Notice remain open. These include:
- Whether an Issuing Bank has properly calculated the accrual of credit card fees treated as OID for purposes of §1272(a)(6).
- Whether an Issuing Bank has properly changed its accounting method with respect to the treatment of credit card fees as OID subject to deferral under §1272(a)(6).
Exam teams should continue to develop any remaining open issues, subject to a documented risk and materiality analysis as described in Industry Director Directive #1.
The Issue Management Team (IMT) published three pro forma Information Document Requests (IDRs) on September 28, 2008, as attachments to Directive #1. The IMT will revise the IDRs as necessary to reflect Directive #2. In the meantime, exam teams should continue to use the IDRs with appropriate modifications.
Any questions regarding this Directive may be directed to Banking Technical Advisors, William Coe and Jeff Kammerman, Change in Accounting Method Technical Advisor, Phil Whitworth, or Banking Industry Counsel, Vince Guiliano.
This Directive is not an official pronouncement of law, and cannot be used, cited, or relied upon as such.
Chief Counsel Notice CC-2010-018
cc: Commissioner, LB&I
Deputy Commissioner, International
Deputy Commissioner, Operations
Division Counsel, LB&I
Director, Pre-filing & Technical Guidance
Directors, Field Operations
Director, Performance, Quality, Analysis and Support