Magazine article American Banker

Deferral of Fee Income Reporting OKd by Treasury

Magazine article American Banker

Deferral of Fee Income Reporting OKd by Treasury

Article excerpt

In a favorable tax turn for credit card companies, the Treasury Department has issued new guidelines that include allowing issuers to defer reporting income collected from annual and late fees.

The move cleared a tax practice that had been effectively prohibited by court decisions over the past several years and that American Express Co., Signet Bank Corp., and Barnett Banks Inc. have all defended in court -- reporting annual fees over the course of a year rather than as immediate income.

An Internal Revenue Service procedure explicitly excludes credit card agreements from the provision that permits the deferral for advance payments. The IRS has argued that an annual fee is not an advance payment for services but the up-front cost of the card account. Courts have granted the IRS leeway in interpreting its own rules.

Though it did not change the provision excluding card agreements from the category of advance payments, the Treasury issued a separate provision allowing card issuers to report annual fees over time.

Separately the agency said late fees qualify as interest income and therefore are also eligible for a deferral. It issued the new guidelines Thursday.

Credit card companies -- especially those like American Express that collect hefty annual fees from cardholders -- tend to stretch that income out over the course of the year to avoid paying immediate taxes.

In its failed 2001 lawsuit against the federal government, American Express tried to defend its practice of reporting one-twelfth of its annual fee payments per month. …

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