The IRS today released an advance version of Notice 2015-76 stating that Treasury and the IRS are considering issuing regulations to exclude from the excise tax imposed under section 4261(a), certain amounts attributable to mileage awards (“frequent flyer miles”) that are redeemed for goods and services other than taxable air transportation—for example, redemptions for international air transportation, restaurant gift cards, magazine and newspaper subscriptions, free hotel nights, and items from an airline’s shopping catalog.
Notice 2015-76 [PDF 38 KB] requests comments on issues to be addressed in the potential regulations, with comments due 120 days after publication of the notice in the Internal Revenue Bulletin (scheduled for November 16, 2015).
Section 4261(a) imposes an excise tax on the amount paid for the “taxable transportation” of any person (defined as transportation by air that begins and ends in the United States). Section 4261(e)(3)(A) provides that:
To date, Treasury and the IRS have not prescribed an allocation method that taxpayers (e.g., credit card companies) and collectors (typically airlines’ mileage awards programs) can apply, to exclude from the taxes imposed by section 4261(a) amounts attributable to mileage awards that are used other than for taxable air transportation. Currently, these taxpayers must pay tax on all frequent flyer miles purchased from an airline mileage awards program and then file a claim for credit or refund for tax paid on those frequent flyer miles that were ultimately redeemed other than for taxable air transportation.
Today’s notice states that Treasury and the IRS are considering a possible safe harbor methodology—one that would allow a reduction in a taxpayer’s section 4261(a) tax base for amounts paid for mileage awards based on historical redemption data.
Notice 2015-76 outlines how a “base period” under the safe harbor would be determined, and then how that base period would be applied to determine an exclusion ratio. The IRS notice provides an example of how this calculation would be applied.
Notice 2015-76 also sets forth what could be possible procedures for a collector of the section 4261(a) excise tax to report the exclusion ratio to the IRS (by February 1 of the year after the close of the base period).
The Treasury and IRS have specifically requested comments on the following issues:
Since enactment of the mileage award provision in 1997, guidance has been needed on the issue of providing an allocation methodology for mileage awards. Not only does this issue affect the airlines as the collector of the tax, but this also affects the credit card companies as the taxpayer. Affected stakeholders need to review Notice 2015-76 and consider submitting comments that would be useful for Treasury and the IRS to have in crafting an administrable rule that would reflect the economic substance of the transactions and the business practices of the affected stakeholders.
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