Credit card rewards may qualify for the recurring item exception

Plain-English summary

Chief Counsel analyzed when an accrual-method credit card issuer may deduct reward liabilities under Section 461. A reward liability becomes fixed and reasonably determinable when the cardholder can redeem the reward for cash or a statement credit without making another purchase. Economic performance occurs only when the issuer pays cash, grants a statement credit, or provides the selected goods or services. The issuer may use the recurring item exception to deduct rewards in the year the liability becomes fixed if the rewards are redeemed within the required period, generally no later than eight and one-half months after year-end. Programs that require another purchase before redemption do not fix the liability at the earlier point and therefore do not qualify for that treatment.

Ruling snapshot

• Question: When are credit card reward liabilities fixed, when does economic performance occur, and may the issuer use the recurring item exception?
• Outcome: advice given
• Key authorities: IRC § 461; Treas. Reg. §§ 1.461-1, 1.461-4, 1.461-5; United States v. General Dynamics Corp.; Giant Eagle, Inc. v. Commissioner

Full text (IRS public release)

          Office of Chief Counsel
          Internal Revenue Service
          memorandum
          Number: 202417021
          Release Date: 4/26/2024
          CC:ITA:B03:JRGrill
          POSTS-107600-22

 UILC:    461.01-00, 461.06-01

  date:   April 24, 2024

    to:   Gwen H. Schoen
          Senior Counsel, Area 5
          (Large Business & International)

  from: Ronald J. Goldstein
          Senior Technician Reviewer, Branch 2
          (Income Tax & Accounting)


subject: Credit Card Reward Liabilities Under I.R.C. Section 461

          This Chief Counsel Advice responds to your request for assistance. This advice may
          not be used or cited as precedent.


                                                          ISSUES

          1. When do credit card reward liabilities become fixed and determinable under § 461? 1

          2. When does economic performance occur under § 461(h) for credit card reward
             liabilities?

          3. Can a taxpayer adopt the recurring item exception under Treas. Reg. § 1.461-5 with
             regard to credit card reward liabilities?

                                                     CONCLUSIONS

          1. Credit card reward liabilities become fixed and determinable under § 461 when the
             cardholder has the right to redeem the rewards for cash or a statement credit.



          1
           Unless otherwise indicated, all section references refer to the Internal Revenue Code, and all regulation
          sections refer to the Income Tax Regulations.
POSTS-107600-22                              2

2. Economic performance occurs under § 461(h) and Treas. Reg. § 1.461-4(g)(3) when
   reward payments are made to the cardholder in the form of cash, a statement credit,
   or other goods or services.

3. Credit card issuers may adopt the recurring item exception under Treas. Reg.
   § 1.461-5 to deduct reward liabilities in the year that they become fixed and
   determinable, provided that the rewards are redeemed by the cardholder within 8 ½
   months after the close of that taxable year.

                                      BACKROUND

Many industries employ reward programs to encourage consumers to buy or use their
products. Each reward program operates slightly differently based on the industry and
applicable user agreement. This memorandum addresses credit card issuers, such as
banks, that operate reward programs to incentivize cardholders to use their credit cards
to pay for new purchases. These reward programs sometimes differ in the manner in
which rewards are earned, computed, or redeemed; however, credit card reward
programs are generally point based. For example, reward programs may provide
varying amounts of reward points based on the purchase category, require a minimum
amount of points to accrue before redemption, or permit the cardholder to redeem their
reward points at any time. In addition, some credit card issuers permit the cardholder to
redeem their rewards for cash or a statement credit while others may also permit the
cardholder to redeem their rewards for goods or services.

                                          FACTS

For purposes of this memorandum assume Taxpayer is a federally chartered bank that
issues credit cards to cardholders which allow the cardholders to access revolving lines
of credit to make purchases of goods and services and to obtain cash advances.
Taxpayer allows its cardholders to earn rewards by accumulating miles, points, or cash
that can then be redeemed for cash, statement credits, travel, gift cards to third party
vendors, and other goods and services (“credit card rewards” or “rewards”).
Cardholders may redeem their rewards through contacting the bank directly by phone,
or going through the bank’s website or mobile app (all redemption methods hereinafter
collectively referred to as “app”). Taxpayer’s reward program does not have redemption
thresholds, and rewards are redeemable immediately upon receipt at the close of the
cardholder’s billing period without an additional purchase required.

As relevant here, a cardholder can earn different amounts of points, i.e., 1, 2, or 3 points
per dollar charged, based on the transaction category, i.e., gas, restaurant, travel, etc.
Each point is valued at $.01 for redemption purposes, and a cardholder may use
Taxpayer’s app to request a redemption of reward points by inputting the number of
points that the cardholder wishes to redeem and clicking the “redeem” button to execute
the redemption. Immediately upon clicking the “redeem” button on the app, Taxpayer
makes the redemption payment by sending the cardholder a check, issuing a statement
credit, or providing the cardholder with the selected reward benefit. At the same time,
POSTS-107600-22                               3

the cardholder’s total points available for redemption are reduced by the number of
points redeemed.

Taxpayer currently deducts the liability that it incurs for its credit card rewards when the
rewards are redeemed. However, Taxpayer would like to adopt via an accounting
method change the recurring item exception and deduct the liability for credit card
reward expenses in the taxable year that the rewards are earned by its cardholders,
provided that the rewards are redeemed within 8 ½ months after the end of the taxable
year.

                                   LAW AND ANALYSIS

Section 461(a) of the Internal Revenue Code provides that, in general, the amount of
any deduction or credit allowed by this subtitle shall be taken for the taxable year which
is the proper taxable year under the method of accounting used in computing taxable
income. Under an accrual method of accounting, a liability (as defined in Treas. Reg.
§ 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 with respect to the liability. Section
461(h); Treas. Reg. § 1.461-1(a)(2).

All-Events Test

Generally, for purposes of establishing the fact of a liability, a taxpayer may not “deduct
an estimate of an anticipated expense, no matter how statistically certain, if it is based
on events that have not occurred by the close of the taxable year.” United States v.
General Dynamics Corp., 481 U.S. 239, 243-44 (1987); compare with United States v.
Hughes Properties, Inc., 476 U.S. 593, 602-03 (1986) (casino jackpot liability was
unconditionally fixed under Nevada law); Gold Coast Hotel & Casino v. United States,
158 F.3d 484, 488-89 (9th Cir. 1998) (casino points liability was fixed and unconditional
under state gaming regulations once a member accumulated the minimum number of
points). In accordance with General Dynamics, the Service’s longstanding position is
that all the events have not occurred to establish the fact of a liability if there is a
condition precedent that is not ministerial. A requirement that a customer must make an
additional purchase to redeem a reward is a condition precedent that is not a ministerial
act and results in a reward liability not being fixed for purposes of the first prong of the
all-events test.

The issue of reward payments was most recently considered by the Third Circuit, which
ruled that a taxpayer’s anticipated liability for unredeemed gasoline discounts was fixed
in the year earned for purposes of the all-events test. Giant Eagle, Inc. v.
Commissioner, 822 F.3d 666 (3rd Cir. 2016), rev’g T.C. Memo 2014-146. The liability in
Giant Eagle involved a gasoline discount program that entitled a customer to receive a
“discount coupon” for a 10 cents per gallon reduction in price for every $50 spent on
POSTS-107600-22                                        4

groceries. However, the discount coupons required an additional purchase of gasoline,
were only valid at certain gas stations, and they expired three months after the last day
of the month in which they were issued. The IRS disagrees with the Third Circuit’s
decision and issued an Action on Decision (“AOD”) that reiterated the Service’s position
that a “taxpayer’s liability for its unredeemed discount coupons is not fixed before the
customer purchases the fuel” because the additional purchase of gasoline is not a
ministerial act and is, therefore, a condition precedent to the establishment of the
liability in accordance with General Dynamics. AOD-2016-03 (2017), I.R.B. 2016-40.

In light of this position and because the credit card rewards at issue are immediately
redeemable for a predetermined amount of cash or a statement credit, there is no
condition precedent, notwithstanding the fact that customers’ rewards may also be
redeemed for goods or services. In contrast, reward programs that do not provide
redemption options that include cash or a statement credit but require an additional
purchase to receive a partial or complete discount have a condition precedent such that
the accrued reward liabilities are not fixed for purposes of the all-events test until the
rewards are actually redeemed. 2

We conclude, consistent with the Service’s longstanding position and the Giant Eagle
AOD, that the credit card reward liabilities discussed above are fixed to establish the
fact of the liability and the amounts determinable when they become redeemable for
cash or a statement credit because there is no additional purchase required to redeem
the rewards. The credit card rewards program at issue is distinguishable from General
Dynamics because a cardholder’s right to redemption for cash or a statement credit is
fixed and the redemption act is ministerial, versus the condition precedent—claim
submission and approval—present in General Dynamics. Likewise, the program at
issue is distinguishable from Giant Eagle because cardholders are not required to make
an additional purchase of gasoline at specific locations within a limited time period to
receive the reward benefit.

Economic Performance

For purposes of determining whether an accrual basis taxpayer can treat the amount of
any liability (as defined in Treas. Reg. § 1.446-1(c)(1)(ii)(B)) as incurred, the all-events
test is not treated as met any earlier than the taxable year in which economic
performance occurs with respect to the liability. I.R.C. § 461(h); Treas. Reg. § 1.461-
4(a)(1).3 If the liability of a taxpayer is to pay a rebate, refund, or similar payment to

2
  Taxpayers operating reward programs where the liabilities are not fixed until redemption have not
satisfied the all-events test and are, therefore, not eligible for the recurring item exception discussed infra.
3
  Taxpayers with reward programs that allow a cardmember to receive a partial or full discount on the
purchase of an item are issuers of “hybrid coupons” subject to the all-events test and economic
performance requirement provided in § 461(h). See AM 2017-002 discussing premium, discount, and
hybrid coupons. Treas. Reg. § 1.451-4 provides an exception to the all-events test and § 461(h) for
issuers of “trading stamps” and “premium coupons.” Taxpayer is not eligible for the § 1.451-4 exception
because the credit card rewards are “hybrid coupons.”
POSTS-107600-22                               5

another person (whether paid in property, money, or as a reduction in the price of goods
or services to be provided in the future by the taxpayer), economic performance occurs
when payment is made to the person to which the liability is owed. Treas. Reg. § 1.461-
4(g)(3) and (8), Example 2.

We conclude that Taxpayer’s credit card rewards that are redeemable for cash, a
statement credit, or other goods or services are a rebate, refund, or similar payment for
purposes of Treas. Reg. § 1.461-4(g)(3). A rebate is generally a return of an amount
actually paid by a customer in a sale. Under credit card reward programs, the
cardholder receives cash back or other rewards as a result of making purchases with
the credit card in an amount determined by the purchase price. While the rewards do
not technically constitute a rebate, they are sufficiently similar to a rebate to constitute a
“similar payment” under Treas. Reg. § 1.461-4(g)(3). Accordingly, for Taxpayer’s credit
card rewards, economic performance for purposes of the all-events test is satisfied
under Treas. Reg. § 1.461-4(g)(3) when the redemption payment is made.

Recurring Item Exception

Section 461(h)(3) and Treas. Reg. § 1.461-5 allow a taxpayer to treat a liability as
incurred prior to economic performance occurring by adopting the recurring item
exception as a method of accounting for recurring items under certain circumstances.
Treas. Reg. § 1.461-5(b) provides that a liability is treated as incurred for a taxable year
if (1) as of the end of the taxable year, all events have occurred that establish the fact of
the liability and the amount of the liability can be determined with reasonable accuracy;
(2) economic performance occurs on or before either the earlier of the date the taxpayer
files a timely (including extensions) filed return or the 15th day of the 9th month after the
close of that taxable year; (3) the liability is recurring in nature; and (4) either the
amount of the liability is not material, or the accrual of the liability for that taxable year
results in a better matching of the liability with the income to which it relates than would
result from accruing the liability for the taxable year in which economic performance
occurs. Treas. Reg. § 1.461-5(b)(5)(ii) provides that for liabilities subject to Treas. Reg.
§ 1.461-4(g)(3), such as rebates and refunds, the matching requirement of Treas. Reg.
§ 1.461-5(b)(1)(iv)(B) is deemed to be satisfied.

We conclude that Taxpayer’s credit card rewards are eligible for the recurring item
exception set forth in Treas. Reg. § 1.461-5 because the liability is fixed and
determinable, recurring in nature, and the accrual of the liability for that taxable year
results in a better matching of the liability with the income to which it relates. Taxpayer
may, therefore, satisfy the all-events test where economic performance, i.e., payment
on redemption, occurs on or before either the earlier of the date Taxpayer files a timely
return (including extensions) or the 15th day of the 9th month after the close of that
taxable year.

Please call Justin Grill at (202) 317-5100 if you have any further questions.