Christine Hurt blogged the gift card program offered by Mader’s Restaurant in Madison, Wisconsin, as recounted in the Milwaukee Journal Sentinel:  To mark its 100th anniversary, the restaurant is selling $20 cards that can be redeemed for $5,000 in 2103 (roughly an 8% interest). The restaurant sells $50,000 – $70,000 of the cards each year but is not setting aside any cash to pay the liability due in 97 years.  When asked by the reporter whether the growth rate was realistic, the restaurant manager replied: "’What do we care? We’ll both be dead anyway."

Christine notes:

So, before I go out and buy a zillion of them, how will this play out? I assume that the cards were issued by some sort of entity, either a corporation, an LLC, or an LP. When Mr. Mader dies, I assume this 100-year-old restaurant, started by his grandfather, will continue. The restaurant (entity that owns the restaurant) may in fact last another 100 years. The restaurant entity will then seem to be liable for up a very large sum should these cards not be lost. If the restaurant entity tries to liquidate in any way, before 2103, these obligations would have to be accounted for in some way. And, should the cards be lost, that money should escheat to the state, with the restaurant entity writing a check to the state of Wisconsin. There seem to be a lot of issues here that Mr. Mader does not see. Perhaps his heirs should talk to him.

Of course, I was intrigued by the many unanswered tax (and securities) questions.  Do the OID rules require buyers of the gift cards to report the accrued interest as income each year? Can the restaurant deduct the accrued interest obligation each year?  Comments are open!