Internal Revenue Bulletin:  2005-32 

August 8, 2005 

Rev. Proc. 2005-47


SECTION 1. PURPOSE

This revenue procedure describes conditions under which the Commissioner will allow a taxpayer to treat credit card cash advance fees as creating or increasing original issue discount (OID) on a pool of credit card loans that includes the cash advances that give rise to these fees. This revenue procedure also provides the exclusive procedure by which a taxpayer within the scope of this revenue procedure may obtain the Commissioner’s consent to change its method of accounting for credit card cash advance fees to a method that treats these fees as creating or increasing OID on a pool of credit card loans that includes the cash advances that give rise to the fees.

SECTION 2. BACKGROUND

.01 Certain taxpayers issue credit cards that allow cardholders to access a revolving line of credit to purchase goods and services (“credit card purchase transactions”) and to obtain cash advances (“cash advance transactions”). The credit card agreement between the credit card issuer and the cardholder sets forth the terms and conditions that govern the cardholder’s use of the credit card, including identification of which credit card transactions are treated as cash advance transactions.

.02 Under many credit card agreements, the credit card issuer imposes a fee (a “credit card cash advance fee”) on the cardholder when the cardholder uses the credit card to conduct a cash advance transaction. Although the terms of credit card agreements may vary, a credit card cash advance fee is generally a flat fee or a percentage of the face amount of the cash advance (often subject to minimum and maximum limits). Credit card cash advance fees are generally imposed in addition to any stated periodic interest rate charges.

.03 Under § 1273(a)(1) of the Internal Revenue Code, OID is the excess of the stated redemption price at maturity (SRPM) of a debt instrument over the issue price of that instrument. Under § 1.1273-1(b) of the Income Tax Regulations, the SRPM is the sum of all payments provided by the debt instrument other than payments of qualified stated interest (QSI). Under § 1.1273-1(c), QSI is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) or that will be constructively received under § 451 at least annually at a single fixed rate. See § 1.1273-2 for rules to determine the issue price of a debt instrument.

.04 Section 1272(a)(6) provides rules for determining the daily portions of OID on certain debt instruments. The instruments covered include REMIC regular interests and qualified mortgages held by REMICs, debt instruments the payments under which may be accelerated by reason of prepayments of other obligations securing the debt instruments, and any pool of debt instruments the yield on which may be affected by reason of prepayments.

.05 Rev. Proc. 2004-33, 2004-1 C.B. 989, describes conditions under which the Commissioner will allow a taxpayer within the scope of that procedure to treat credit card late fees as creating or increasing the amount of OID on a pool of credit card loans to which those fees relate. Under Rev. Proc. 2004-33, a credit card late fee that is a one-time charge or a flat sum imposed in addition to a stated periodic interest charge may be treated as creating or increasing OID if that fee otherwise satisfies the revenue procedure’s requirements.

.06 Any change in the taxpayer’s treatment of credit card cash advance fees that affects when income is recognized is a change in method of accounting to which the provisions of §§ 446 and 481, and the regulations thereunder, apply. Under § 1.446-1(e)(2)(i), a taxpayer generally must secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the terms and conditions necessary to obtain consent to change a method of accounting.

.07 Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561, modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, and amplified, clarified, and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432), provides procedures by which taxpayers may obtain automatic consent to change to the methods of accounting described in the Appendix of Rev. Proc. 2002-9. Section 5.03 of Rev. Proc. 2002-9 provides that, unless otherwise provided, a taxpayer making a change in method of accounting under the revenue procedure must take into account a section 481(a) adjustment in the manner provided in section 5.04 of Rev. Proc. 2002-9.

SECTION 3. SCOPE

This revenue procedure applies to a taxpayer if—

.01 The taxpayer issues credit cards allowing cardholders to access a revolving line of credit established by the taxpayer both to make credit card purchase transactions and to obtain cash advances; and

.02 For federal income tax purposes, the taxpayer does not treat the credit card purchase transactions of its cardholders as creating debt that is given in consideration for the sale or exchange of property.

SECTION 4. APPLICATION

.01 Subject to subsection .02 of this section 4, if a taxpayer is within the scope of this revenue procedure, the Commissioner will not challenge the taxpayer’s treatment of credit card cash advance fees as creating or increasing the amount of OID on a pool of credit card loans that includes the cash advances that give rise to those fees.

.02 Subsection .01 of section 4 of this revenue procedure applies only if the taxpayer satisfies all of the requirements of section 5 of this revenue procedure and, if the taxpayer is changing its method of accounting, all of the requirements of section 6 of this revenue procedure.

SECTION 5. REQUIREMENTS

A taxpayer must be able to demonstrate the following:

.01 The amount of any credit card cash advance fee charged to a cardholder by the taxpayer is separately stated on the cardholder’s account when that fee is imposed; and

.02 Under the credit card agreement, no amount identified as a credit card cash advance fee is charged for property or for specific services performed by the taxpayer for the benefit of the cardholder.

SECTION 6. CHANGE IN METHOD OF ACCOUNTING

If a taxpayer within the scope of this revenue procedure wants to change its method of accounting for credit card cash advance fees and if, under the method to which the taxpayer is changing, these fees are treated as creating or increasing the amount of OID on a pool of credit card loans that includes the cash advances that give rise to those fees, the taxpayer must follow the provisions of Rev. Proc. 2002-9 (or its successor), with the following modifications:

.01 The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not apply to a taxpayer that makes the change for either its first or second taxable year ending on or after December 31, 2004; and

.02 The taxpayer must prepare and file a Form 3115 in accordance with section 6 of Rev. Proc. 2002-9 and enter the designated number (“94”) for this automatic change in method in Line 1a of Form 3115.

SECTION 7. AUDIT PROTECTION

.01 If a taxpayer within the scope of this revenue procedure currently uses a method of accounting that treats credit card cash advance fees as creating or increasing the amount of OID on a pool of credit card loans that includes the cash advances that give rise to those fees, the issue of whether that treatment is proper will not be raised by the Commissioner for a taxable year that ends before December 31, 2004.

.02 If a taxpayer within the scope of this revenue procedure currently uses a method of accounting that treats credit card cash advance fees as creating or increasing the amount of OID on a pool of credit card loans that includes the cash advances that give rise to those fees and its use of that method is an issue under consideration (within the meaning of section 3.09 of Rev. Proc. 2002-9) in examination, before an appeals office, or before the U.S. Tax Court for any taxable year that ends before December 31, 2004, that issue will not be further pursued by the Service.

.03 Neither the audit protection provided in connection with a change in a taxpayer’s method of accounting for credit card cash advance fees that is properly made under section 6 of this revenue procedure nor the audit protection provided under sections 7.01 and 7.02 of this revenue procedure is a determination by the Commissioner that the taxpayer is properly accounting for any OID income on that pool of credit card loans. Thus, for example, the Service is not precluded from pursuing the issue of whether, under § 1272(a)(6), a taxpayer is correctly accounting for its OID income (including any OID attributable to credit card cash advance fees) on its pool of credit card loans.

SECTION 8. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2002-9 is modified and amplified to include this automatic change in the APPENDIX.

SECTION 9. EFFECTIVE DATE

This revenue procedure is effective for taxable years ending on or after December 31, 2004.

DRAFTING INFORMATION

The principal authors of this revenue procedure are Jonathan Silver and Tina Jannotta of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue procedure, contact the principal authors at (202) 622-3930 (not a toll-free call).


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