IRS will not challenge OID treatment of interchange fees.

• Author: Dell, Michael
• Position: Original issue discount

In Chief Counsel Notice CC-2010-018, the IRS announced that it will no longer challenge whether interchange fee income earned by credit card issuers creates or increases original issue discount (OID) on a pool of credit card loans. The IRS did not address the calculation of the portion of interchange fees includible under the OID rules in each period.

Background

In Capital One Financial Corp., 133 T.C. 136 (2009), the Tax Court determined that interchange fees charged on credit card transactions were a form of OID. Accordingly, the taxpayer was not required to include the fees in full in income in the year of the transaction but could spread the fees over the life of the credit card loans to which they related.

The court also addressed the methodology of recognizing the interchange fees (and other fees treated as OID) in income under the provisions of Sec. 1272(a)(6) and generally accepted the taxpayer's methodology, with certain exceptions. Further, the court ruled that the taxpayer's credit card rewards were not issued to customers for sales within the meaning of Regs. Sec. 1.451-4, and therefore costs associated with the rewards could not be deducted earlier than when the rewards were actually redeemed.

Implications

The good news is that taxpayers should no longer have IRS auditors challenging their treatment of credit card interchange fees as OID. The bad news is that there is still...