Accounting for credit card fees.The Tax Court ruled on the proper accounting for annual fees received by credit card issuers in two recent cases: Barnett Banks Barnett Bank, founded in 1877, eventually became the largest commercial bank in Florida. It was purchased by NationsBank in 1997, but even before signs on Barnett's branches were changed, NationsBank merged with BankAmerica Corp., creating Bank of America. of Florida Inc. v. Commissioner (106 T.C. no. 4, 1996) and Signet Banking Corp. v. Commissioner (106 T.C. no. 5, 1996). Both Barnett and Signet charged a fixed annual fee that was not based on the holder's credit line, card usage or account balance. Barnett's fee was refundable if the card was canceled, but Signet's was not and, under the express terms of the cardholder card·hold·er n. One who holds a card, especially a credit card. card  hold agreement, was paid when the card was issued and
a credit limit was established: In Barnett, the bank was permitted to
amortize the fee into income over 12 months, while in the Signet case,
the fee was taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. in the year of its receipt.
Revenue procedure 71-21 allowed taxpayers who use an accrual method to defer recognition as income of payment received in one year for services performed by the end of the succeeding year. Barnett benefited from the ruling even though it was unable to match income and expenses on an individual cardholder basis. The court found that such matching was unnecessary because the revenue procedure expressly permitted a straight-line determination of the amount of the fee earned when, as here, it was reasonable to anticipate that the relevant service would be rendered on that basis. Signet, however, was unable to defer inclusion of the fee in income. Because the cardholder agreement required payment of the annual fee when an account was opened and a credit limit established, the bank was fully entitled to the fee when those acts were performed. Observation: Revenue procedure 71-72 implicitly requires that taxpayers show that the disputed payment is for service to be performed in the year following the receipt. In Signet, the required service--issuance of the card--always occurred before payment of the fee, so the deferral deferral - Waiting for quiet on the Ethernet. , under the revenue procedure, was unavailable. Taxpayers should follow the Barnett precedent. Robert Willens, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , managing director at Lehman Brothers Lehman Brothers Holdings Inc. (NYSE: LEH), founded in 1850, is a diversified, global financial services firm. It is a participant in investment banking, equity and fixed income sales, research and trading, investment management, private equity, and private banking. , New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. . |
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