United Asks for Advance Payment to Include Airline Miles

United Airlines, Inc. Comments on § 451(c) — Advance Payments for Airline Miles

September 5, 2018

Courier's Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2018-35)
1111 Constitution Avenue, NW
Washington, DC 20224

Ladies and Gentlemen:

United Airlines, Inc. ("United") appreciates the opportunity to comment on the development of rules around new § 451(c), as the new tax and financial reporting rules around revenue recognition will meaningfully affect our business. We would like to thank Peter Ford and the Income Tax & Accounting team in advance for taking the time to review this letter regarding the revenue recognition treatment of advance payments received for airline miles we issue and sell as part of our loyalty program.

United transports people and cargo through its mainline and regional operations. With key global aviation rights in North America, Asia-Pacific, Europe, Middle East and Latin America, United has the world's most comprehensive global route network. United, along with its regional carriers, operates more than 4,500 flights a day to 357 airports across five continents, with hubs at Newark Liberty International Airport, Chicago O'Hare International Airport, Denver International Airport, George Bush Intercontinental Airport, Los Angeles International Airport, A.B. Won Pat International Airport, San Francisco International Airport and Washington Dulles International Airport.

Our loyalty program, MileagePlus, builds customer loyalty by offering awards, benefits and services to program participants. Members in this program earn miles for flights on United, United Express and other airline partners that participate in the program. Members can also earn miles by purchasing the goods and services of our network of non-airline partners. We sell miles to these partners, which include domestic and international credit card issuers, retail merchants, hotels, car rental companies and our participating airline partners. Miles can be redeemed for free (other than taxes and government imposed fees), discounted or upgraded air travel and non-travel awards.

In section 4 of Notice 2018-35, Treasury and the IRS invited taxpayers to make suggestions regarding future guidance under §§ 451(b) and (c). Specifically, you requested comments as to whether other items besides those listed in section 4.01(3) of Rev. Proc. 2004-34 should be included in the definition of an advance payment. In these comments, we would suggest that airline miles be added to the list of items to be included in the definition of an advance payment, as they are a unique type of item but are generally redeemed for goods and services to be provided in the future.

BACKGROUND

Financial Statement Revenue Recognition

General

The Financial Accounting Standards Board and the International Accounting Standards Board have jointly issued a new revenue recognition standard that supersedes virtually all revenue recognition guidance for U.S. GAAP and IFRS. This guidance outlines the principles an entity must apply to measure and recognize revenue from contracts with customers. The core principle is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer.

Airline Miles

Consistent with the requirements of ASC 606, when frequent flyers earn miles for flights, United recognizes a portion of the ticket sales as revenue when the air transportation occurs and defers a portion of the ticket sale representing the value of the related miles as a separate performance obligation. United determines the estimated selling price of air transportation and miles as if each element is sold on a separate basis and the total consideration from each ticket sale is then allocated to each of these elements, individually, on a pro rata basis. At the time of travel, the portion allocated to the miles is recorded to frequent flyer deferred revenue on United's consolidated balance sheet and subsequently recognized into revenue when the transportation is provided or when goods or services associated with non-travel awards are delivered. Similarly, with respect to miles sold to our non-airline partners, the portion of the revenue related to the miles awarded for future air travel and non-travel award redemptions is deferred to frequent flyer deferred revenue and subsequently recognized into revenue when the transportation is provided or the goods or services are delivered. The portion of the revenue related to marketing and advertising is recognized into revenue when miles are earned by program members.

Tax Revenue Recognition

New § 451(c) provides a limited deferral of revenue recognition for goods, services and other items to be specified by the Secretary. As noted above, Notice 2018-35 requests comments including suggestions for future guidance under § 451(b) and (c). In particular, comments were requested concerning whether other items in addition to those listed in section 4.01(3) of Rev. Proc. 2004-34 should be included in the definition of an advance payment.

Section 4.01(3) of Rev. Proc. 2004-34 lists the following as eligible to be considered advance payments: payments received for — goods; services; the use of intellectual property; the occupancy or use of property if ancillary to the provision of services; the sale, lease, or license of computer software; guaranty or warranty contracts ancillary to items listed above; subscriptions; memberships; an eligible gift card sale (as added by Rev. Proc. 2011-18); and any combination of the above. Although section 4.01(3) does not expressly include airline miles as an item eligible to be considered as an advance payment, section 4.02 of Rev. Proc. 2004-34 does not specifically exclude them from the term “advance payment" either.

REQUEST TO INCLUDE PAYMENTS FOR AIRLINE MILES AS AN ADVANCE PAYMENT

As described above, a participant in our MileagePlus program can redeem miles for air travel and non-travel awards. As a result, a payment for miles should be viewed as payment for goods or services to be provided in the future. Further, airline miles cannot be redeemed for any of the items excluded from treatment as an advance payment in section 4.02 of Rev. Proc. 2004-34. Finally, any payment received by an airline for miles is received prior to the time the miles are redeemed and the related goods and/or services are provided. Thus, in many ways, airline miles are very similar to the items eligible to be considered advance payments by section 4.01(3) of Rev. Proc. 2004-34.

Although it may be possible for taxpayers to argue (based on the above) that the sale of airline miles fits within the definition of an advance payment enunciated in Rev. Proc. 2004-34, we feel that it would be helpful to specifically include airline miles in advance payment guidance to be provided under new § 451(c). Adding airline miles to the list of potential advance payments (and including them in an example if possible) would be helpful for both taxpayers and the government alike to provide clarity and avoid potential controversy in the future.

Given the above, United respectfully requests that airline miles be included in the definition of an advance payment for purposes of new § 451(c).

United appreciates the opportunity to submit this letter and would be happy to meet with the IRS or Treasury to discuss the revenue recognition of our MileagePlus program in further detail.

Respectfully submitted,

Timothy Tamer
Managing Director — Tax
United Airlines
Chicago, IL

cc:
David Kautter, Assistant Secretary (Tax Policy), Acting IRS Commissioner
Thomas West, Tax Legislative Counsel
Christopher Call, Attorney Advisor
Ellen Martin, Tax Policy Advisor
US Department of Treasury
1500 Pennsylvania Ave NW
Washington, DC 20220

Scott Dinwiddie, Associate Chief Counsel (IT&A)
John Moriarty, Deputy Associate Chief Counsel (IT&A)
Peter Ford, Senior Attorney
Internal Revenue Service
1111 Constitution Ave NW
Washington DC 20224