n-15-76.pdf

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Part III - Administrative, Procedural, and Miscellaneous

REQUEST FOR COMMENTS REGARDING THE EXCISE TAX ON AMOUNTS PAID FOR THE RIGHT
TO PROVIDE MILEAGE AWARDS

Notice 2015-76

SECTION 1. PURPOSE

The Treasury Department and the Internal Revenue Service (IRS) are considering exercising
their authority under § 4261(e)(3)(C) of the Internal Revenue Code (Code) to prescribe rules to exclude
from the tax imposed by § 4261(a) certain amounts attributable to mileage awards (sometimes referred to
as “frequent flyer miles”) that are redeemed other than for the taxable transportation of persons by air
(referred to in this notice as “other than for taxable air transportation”), such as, but not limited to,
redemptions for international air transportation, restaurant gift cards, magazine and newspaper
subscriptions, free hotel nights, and items from the airline’s shopping catalog. This notice invites public
comments on issues that should be addressed in guidance relating to § 4261(e)(3).
SECTION 2. BACKGROUND
Section 4261(a) of the Code imposes a tax on the amount paid for the taxable transportation of
any person.
Section 4262(a) defines “taxable transportation” to generally include transportation by air that
begins and ends in the United States.
Section 4261(d) provides that the tax is paid by the person making the payment subject to tax,
and § 4291 provides that the tax is collected by the person receiving the payment.
Section 4261(e)(3)(A) provides that for purposes of § 4261(a) any amount paid (and the value of
any other benefit provided) to an air carrier (or any related person) for the right to provide mileage awards

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for (or other reductions in the cost of) any transportation of persons by air is treated as an amount paid for
taxable transportation.
Section 4261(e)(3)(C) provides that the Secretary may prescribe rules that exclude amounts
attributable to mileage awards that are used other than for the transportation of persons by air from the
tax imposed by § 4261(a).
Congress enacted § 4261(e) as part of the Taxpayer Relief Act of 1997 (Public Law 105-34, 111
Stat. 788). The General Explanation of Tax Legislation Enacted in 1997 (General Explanation), prepared
by the Joint Committee on Taxation, JCS-23-97 at 230-231, explains that § 4261(e)(3)(C) authorizes the
Treasury Department to develop regulations excluding from the § 4261(a) tax base a portion of otherwise
taxable payments, if any, with respect to awarded frequent flyer miles “if the Treasury determines that a
portion properly can be allocated (traced) to frequent flyer miles that are used by consumers for purposes
other than air transportation.” General Explanation at 231. The General Explanation further states that
as part of any rulemaking process it undertakes, the Treasury Department is authorized to review airline
mileage awards programs and other information from all available sources, including industry and third-
party data, in determining whether frequent flyer miles can be adequately traced to support allocations
based on the ultimate use of the frequent flyer miles. The General Explanation also states that Congress
intended that any adjustment to the tax base will be prescribed only if the Treasury Department finds a
consistent pattern of non-air transportation usage of frequent flyer miles by consumers at levels indicating
that significant mileage awarded pursuant to payments taxable under § 4261(e)(3) are being used for
purposes other than for taxable air transportation.
The Treasury Department and the IRS have not prescribed an allocation method that taxpayers
(for example, credit card companies) and collectors (typically airlines’ mileage awards programs) can use
to exclude from the taxes imposed by § 4261(a) amounts attributable to mileage awards that are used
other than for taxable air transportation. As a result, taxpayers currently 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 .

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The Treasury Department and the IRS are considering a possible methodology, described in
Section 3 of this Notice, that would allow a reduction in a taxpayer’s § 4261(a) tax base for amounts paid
for mileage awards based on historical redemption data.
SECTION 3. POSSIBLE METHODOLOGY FOR DETERMINING REDUCTION IN SECTION 4261(a)
TAX BASE

The Treasury Department and the IRS are considering an elective safe harbor methodology that
a collector could use to reduce a taxpayer’s § 4261(a) tax base on purchased frequent flyer miles. Under
the methodology, for each 12 month period beginning on April 1 and ending on March 31 (the “Election
Year”), the tax base for frequent flyer miles purchased from a particular airline mileage awards program
would be reduced based on redemption data from that airline mileage awards program for the calendar
year immediately preceding the calendar year in which the Election Year begins (the “Base Period”).
The methodology would be based on the following data from the Base Period:
• Total number of frequent flyer miles redeemed under that program.
• Number of frequent flyer miles under that program redeemed for taxable air transportation.
• Number of frequent flyer miles redeemed under that program other than for taxable air
transportation.
More specifically, for each specific airline mileage awards program (that is, on a per airline
mileage awards program basis), a collector may reduce the tax base upon which the tax imposed by
§ 4261(a) is calculated by applying the following ratio:
i) The number of frequent flyer miles under that program that the airline data shows were
redeemed during the Base Period other than for taxable air transportation; over
ii) The total number of frequent flyer miles under that program that the airline data shows
were redeemed during the Base Period.
The collector will multiply the amount paid for the right to provide frequent flyer miles under the
program by the ratio determined above (the “Exclusion Ratio”) and will reduce the § 4261(a) tax base on
the purchased frequent flyer miles by this amount. The Exclusion Ratio would apply for the entire
Election Year.

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Example. The following example illustrates this methodology:

On April 1, 2015, Company buys 5,000,000 frequent flyer miles from Airline X’s only mileage
award program for $.01 per frequent flyer mile (for a total cost of $50,000). Under current law, if
the § 4261(a) tax is calculated on the gross purchase of the frequent flyer miles, the tax due on
the purchase will be $3,750 ($50,000 x 7.5%).

For the applicable Base Period (that is, January 1, 2014, through December 31, 2014), Airline X
data indicates that frequent flyer miles were redeemed as noted in the table below:

Year
Total Frequent
Flyer Miles
Redeemed
Frequent Flyer Miles
Redeemed for Taxable
Air Transportation

Frequent Flyer Miles
Redeemed for Non-Taxable
Purposes
1/1/2014 -
12/31/2014
100,000,000 70,000,000 30,000,000

Following the methodology described above, Airline X may reduce Company’s tax base on the
purchased frequent flyer miles as follows:

• Frequent flyer miles redeemed other than for taxable air transportation in the Base Period
divided by total frequent flyer miles redeemed in that period: 30,000,000 ÷ 100,000,000
= 30%.

• Exclusion Ratio calculated in the previous step applied to the frequent flyer miles
purchased on April 1, 2015: 30% x $50,000 amount paid for frequent flyer miles =
§ 4261(a) tax base reduction of $15,000. This results in a § 4261(a) tax base of $35,000
($50,000 less $15,000).

Therefore, under this methodology, the tax due on the April 1, 2015, purchase is $2,625 ($35,000
§ 4261(a) tax base x 7.5%).

SECTION 4. POSSIBLE PROCEDURES FOR A COLLECTOR ADOPTING AN EXCLUSION RATIO
FOR A PROGRAM FOR A YEAR

4.01 The collector would file a new form (to be designated by the IRS at a future date) reporting
the Exclusion Ratio to the IRS by February 1 following the close of the Base Period. The collector’s filing
of the form by February 1 constitutes an election to use the safe harbor methodology. The election would
be irrevocable for all frequent flyer miles purchased from the collector during the Election Year beginning
on April 1 following the close of the Base Period.
4.02 The collector would provide notification of the adoption of the use of an Exclusion Ratio and
specify the ratio itself in program literature available to taxpayers by February 1.

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4.03 The collector would be required to use the Exclusion Ratio reported by the collector in its
February 1 filing for the entire Election Year.
4.04 A taxpayer that purchased frequent flyer miles offered by the collector would be deemed to
have elected application of the safe harbor methodology. The collector would be required to reference
this deemed election in program literature available to taxpayers.
4.05 A taxpayer would not subsequently be able to obtain a credit or refund for a portion of the
tax paid if the percentage of frequent flyer miles ultimately redeemed other than for taxable air
transportation ends up being higher than the percentage calculated under the safe harbor methodology,
nor would the taxpayer be assessed additional § 4261(a) tax if the percentage ends up being lower.
SECTION 5. POSSIBLE PROCEDURES FOR FILING FORM 720 APPLYING AN EXCLUSION RATIO
A box would be added to Part I, Communications and Air Transportation Taxes, line IRS no. 26,
of Form 720, Quarterly Federal Excise Tax Return, in which the collector would report the Exclusion
Ratio.
SECTION 6. REQUEST FOR COMMENTS
The Treasury Department and the IRS request comments on issues that should be addressed in
guidance relating to § 4261(e)(3). Specifically, the Treasury Department and the IRS request comments
addressing the following:
• Whether the methodology in Section 3 of this notice, if adopted, is workable for taxpayers,
airlines, and other potential stakeholders.
• Whether the methodology in Section 3 of this notice, if adopted, should be adopted as a rule of
general applicability instead of as a safe harbor provision.
• Whether the methodology in Section 3 of this notice should be modified to take into account a
longer or shorter period of historical data.
• Whether airlines (or airline mileage awards programs) are willing to share historical data with
taxpayers so that taxpayers can verify the tax base upon which the § 4261(a) tax is applied when
a taxpayer purchases frequent flyer miles.

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• Whether in lieu of the methodology in Section 3 of this notice, the Treasury Department and the
IRS should provide an allocation percentage that can be applied on an airline industry-wide basis,
which the Treasury Department and the IRS would calculate using industry-provided data.
• How often an industry-wide allocation percentage, if adopted, should be updated to reflect current
industry data and what is the best method for the Treasury Department and the IRS to collect the
necessary data.
• Whether the Treasury Department and the IRS should adopt a methodology that is not described
in this notice and recommendations for alternative methodologies.
• Whether the Treasury Department and the IRS should provide a mechanism for collectors to
make adjustments to the Exclusion Ratio to correct computational and typographical errors after
the collector reports the Exclusion Ratio to the IRS, and how such a mechanism should work.
• Whether the procedures in Sections 4 and 5 of this notice would be workable from the collector
and the taxpayer’s perspectives.
• How to address overpayments and underpayments of tax resulting from errors in the Exclusion
Ratio, including whether the collector should be responsible for such underpayments.
DATE: Comments must be submitted by [INSERT DATE 120 DAYS FROM DATE OF
PUBLICATION].
ADDRESSES: Comments, identified by Notice 2015-76, may be sent by one of the following
methods:
• Mail:

Internal Revenue Service
CC:PA:LPD:PR (Notice 2015-76)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

• Hand or courier delivery:

Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4
p.m. to:

7
Courier's Desk
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, DC 20224
Attn: CC:PA:LPD:PR
(Notice 2015-76)

• Electronic:

Taxpayers may submit comments electronically to Notice.Comments@irscounsel.treas.gov.
Please include “Notice 2015-76” in the subject line of any electronic communications.

All submissions will be available for public inspection and copying in room 1621, 1111
Constitution Avenue, NW, Washington, DC, from 9 a.m. to 4 p.m.
SECTION 7. NO EFFECT ON OTHER DOCUMENTS

This notice does not affect any other documents.

SECTION 8. NO RELIANCE BY COLLECTORS OR TAXPAYERS

Unless and until the Treasury Department and the IRS issue regulatory or other administrative
guidance under § 4261(e)(3)(C) that adopts the methodology in Section 3 of this notice, the methodology
in Section 3 of this notice does not apply for purposes of calculating the tax due under § 4261(a), and
neither excise tax collectors nor taxpayers may rely on that method or this notice.
SECTION 9. DRAFTING INFORMATION

The principal author of this notice is Michael H. Beker of the Office of Associate Chief Counsel
(Passthroughs & Special Industries). For further information regarding this notice, please contact Mr.
Beker at (202) 317-6855 (not a toll-free call).