IRS Simplifies OID Computations For Credit Card Receivables Pools

The IRS issued guidance (Rev. Proc. 2013-26; 2013-22 IRB 1) that allows taxpayers to use a simplified proportional method of accounting to compute original issue discount (OID) for pools of credit card receivables (CCR pools).

The guidance is intended to reduce administrative burdens and controversy for taxpayers in the computations of OID related to CCR pools under Section 1272(a)(6).

Under the general rules of calculating OID, the taxpayer must know the debt instrument's stated redemption price at maturity (SRPM) and the maturity term. But calculating OID for debts that do not have a known maturity upon inception, like credit card debt, requires calculations under an alternative rule, found under Section 1272(a)(6). Under that section, OID accruals are determined based on a prepayment assumption and a formula involving (i) the present value of all remaining payments under the debt instrument as of the close of the accrual period, (ii) payments during the accrual period of amounts included in the SRPM of the debt instrument, and (iii) the adjusted issue price of the debt instrument at the beginning of the accrual period.

CCR pools differ from other debt instruments subject to Section 1272(a)(6), because the balance of a CCR pool can fluctuate during an accrual period. That increases complexity for the taxpayer when applying the alternative rule — something the IRS guidance attempts to address.

Rev. Proc. 2013-26 applies to a taxpayer if (i) the taxpayer holds receivables arising from credit cards that allow cardholders to access a revolving line of credit to purchase goods and services or obtain cash advances, (ii) the credit card purchase transactions of cardholders do not create debt in consideration...