Signet Banking Corporation v. Commissioner , 106 T.C. No. 5 ( 1996 )

106 T.C. No. 5UNITED STATES TAX COURT
SIGNET BANKING CORPORATION, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7887-92. Filed February 29, 1996.
Christopher Kliefoth and Ralph I. Petersberger, for
petitioner.
Phillip A. Pillar and Scott D. Anderson, for respondent.
P is in the banking business. P issued credit
cards. P charged its credit card holders an annual
membership fee. The cardholder agreement provided that
the fee was paid in consideration of the issuance of a
card and establishment of a credit limit. The
agreement stated that P could close a cardholder’s
account at any time and that the annual membership fee
was nonrefundable. P is an accrual method taxpayer.
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Held, it was not an abuse of discretion for R to
conclude that P must report annual membership fees in
income in the year of receipt.
Held, further, Rev. Proc. 71-21, 1971-2 C.B. 549,
does not permit P to report income from annual
membership fees later than the year of receipt.
COLVIN, Judge: Respondent determined deficiencies in
petitioner's Federal income tax of $233,464 for 1982, $689,257
for 1983, $1,177,475 for 1984, and $1,529,931 for 1985.
The sole issue for decision is whether annual membership
fees petitioner received from its credit card customers are
includable in income in the year in which petitioner received
them, or whether petitioner may defer the income over a 12-month
period under Rev. Proc. 71-21, 1971-2 C.B. 549.
Under the cardholder agreements in effect during the years
in issue, the annual membership fee was paid in consideration of
the issuance of a card and the establishment of a credit limit,
petitioner could close any account at any time, and the fee was
nonrefundable. Petitioner’s right to receive the annual
membership fees was not contingent on petitioner’s performance of
any service after the year of receipt. We hold that it was not
an abuse of discretion for respondent to conclude that petitioner
must include the fees in income in the year of receipt.
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Section references are to the Internal Revenue Code in
effect for the years in issue. Rule references are to the Tax
Court Rules of Practice and Procedure.
FINDINGS OF FACT
1. Petitioner
Petitioner is a Virginia bank holding company that has its
principal place of business in Richmond, Virginia. Petitioner is
the parent of a consolidated group of corporations and the
successor to the Bank of Virginia Co. (BOVACO). BOVACO was the
parent of an affiliated group of corporations that filed
consolidated Federal income tax returns from 1982 to 1985.
BOVACO changed its name to Signet in 1986. Petitioner is in the
banking business. Petitioner is an accrual method taxpayer.
2. The MasterCard Credit Cards
In 1953, petitioner started the BOVA (Bank of Virginia)
Charge Plan. In 1967, petitioner was a founding member of the
Interbank Card Association, which later became MasterCard
International. Before, during, and after the years at issue,
petitioner issued MasterCards and a small number of Visa credit
cards.1
1
The parties agreed to refer to petitioner’s cardholders as
MasterCard cardholders even though respondent's determination
also applies to annual membership fees charged to Visa
cardholders.
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Petitioner’s cardholders may use their MasterCards to charge
the cost of goods and services purchased from participating
merchants. The merchants submit MasterCard sales receipts to
their merchant bank. The merchant bank processes merchants’
credit card transactions. The merchant bank pays the merchants
the amount of the charges less a merchant discount. The merchant
discount is a set percentage, e.g., 2-1/4 percent, of total
charges. The merchant bank transfers the sales draft through
interchange to an issuing bank such as petitioner. The issuing
bank pays the merchant bank the amount of the sales draft less an
interchange fee (for example, 1-1/2 percent of the sales draft).
The interchange fee is paid by the merchant bank to the issuing
bank. The issuing bank bills the cardholder for the full amount
of the sales draft.
Before 1981, petitioner earned interchange fees from
merchant banks. Petitioner earned merchant discounts when it was
both a merchant bank and an issuing bank.
Before 1981, petitioner had two primary sources of income
from MasterCard cardholders: (a) About 90 percent was from
finance charges paid by cardholders who paid less than their full
balance, and (b) about 10 percent was from interchange fees
described above. Petitioner also received from cardholders over
limit fees (not defined in the record), cash advance fees until
May 1983, and other charges, including late payments and credit
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life insurance. Petitioner also received a fee of 2 percent of
the transaction amount for automated teller machine (ATM) and
check access until May 1983.
3. Annual Membership Fees
a. Petitioner’s Decision to Charge an Annual Membership
Fee
In 1980, petitioner's MasterCard business lost money because
the cost of funds used by petitioner was high compared to the
finance charge it could apply to MasterCard cardholders.
Petitioner had three types of cardholders. About 70 percent
were in the "revolver" group (i.e., those who paid less than the
balance due each month and incurred finance charges on the
outstanding balance). About 30 percent were "convenience users"
(i.e., those who used their cards, paid their balance in full,
and thus did not owe finance charges). A small number were
"inactive" (i.e., those who may have used their MasterCards as
identification but did not use them to pay for goods or
services). Convenience users generated interchange fees but not
finance charges. As a group they were minimally profitable.
The inactive group cost petitioner money but generated no income.
Petitioner decided to impose an annual membership fee to recover
some of the cost of delivering services to each group.
Petitioner began to charge its MasterCard cardholders an
annual membership fee in April 1981. Thereafter, petitioner's
credit card division derived income from commissions deducted
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from amounts paid to merchants (merchant discount), interchange
fees, annual membership fees, finance charges paid by
cardholders, cash advance fees (until May 1983), over limit fees,
and other charges (such as late payment and credit life fees).
Other major banks were charging annual membership fees for
credit cards when petitioner decided to charge an annual fee.
Petitioner was one of the first Virginia banks to do so.
b. Annual Membership Fees Charged by Petitioner
To become or remain a MasterCard cardholder after April 1,
1981, petitioner required payment of an annual membership fee of
$15 for a regular MasterCard or $36 for a Special Edition Gold
MasterCard or a commercial account. On April 1, 1981, petitioner
began to charge its regular MasterCard cardholders an annual
membership fee of $15 regardless of the cardholder’s credit line,
usage, balance (if any) carried from month-to-month, or credit
standing. Petitioner first billed cardholders for the annual
membership fee in July 1981. In 1986, petitioner raised the $15
annual membership fee to $18 per year. From 1983 to 1985,
petitioner also offered affinity group (i.e., alumni of a
particular university) MasterCards for $18 and $20.
c. Implementation of the Annual Membership Fee
Petitioner sent its cardholders a disclosure statement as
required by Regulation Z, 12 C.F.R. sec. 226.9(b) (1981), stating
the change in contract terms and a letter describing the services
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provided to cardholders. William F. Binns, petitioner's vice
president in charge of credit card services, answered telephone
and written inquiries objecting to the new fee. He told
cardholders that the card was a good value for $1.25 a month.
Petitioner projected that, as a result of imposing the
annual membership fee, it would lose 25 percent of its MasterCard
accounts, including most in the inactive group and many of the
convenience users. Although many closed their accounts, the
number who did so was less than petitioner had projected.
From 1983 to 1985, petitioner imposed the annual membership
fee at the start of each cardholder’s membership year.
Petitioner billed the fee on the first statement for that year.
From 1983 to 1985, petitioner typically charged cardholders
who incurred interest charges on their balances an 18-percent
annual percentage rate. Petitioner charged its Gold MasterCard
customers a lower rate and charged some of its non-Virginia
customers up to 21 percent. Petitioner considered its Gold
MasterCard customers to be lower risks even though they typically
carried higher monthly balances.
From 1983 to 1985, petitioner occasionally waived the first
year’s membership fee if the customer was a member of an affinity
group, waived the annual fee for the year in response to some
customer complaints, and waived the annual fee for some active
customers who threatened to leave. Otherwise, petitioner
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canceled the MasterCard accounts of cardholders who did not pay
the annual membership fee.
Petitioner had the following number of MasterCard accounts
at yearend:
Year Number of MasterCard Accounts
1983 682,143
1984 759,415
1985 853,498
4. MasterCard Cardholder Agreements
As required by Regulation Z (12 C.F.R. sec. 226.9(a)),
petitioner gave a copy of a charge plan customer agreement and
truth in lending disclosure (the cardholder agreement) to
everyone who opened an account. Thereafter, petitioner did not
give a copy of the agreement to each cardholder each year. As
required by Regulation Z (12 C.F.R. sec. 226.9(c), petitioner
notified cardholders when it changed the terms of the agreement.
The cardholder agreement provided, among other things, that:
the annual membership fee was paid “in consideration of” the
issuance of a card and the establishment of a credit limit,
cardholders were required to surrender their cards upon demand,
petitioner could cancel a card at any time, and the annual
membership fee was nonrefundable. For example, petitioner’s
cardholder agreement, effective April 1981, stated in part as
follows:
OTHER CHARGES. * * *
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4. You agree to pay a non-refundable annual membership
fee of $15.00 in consideration of the issuance of your
Card and the establishment of your credit limit. The
fee will be added to your purchase balance. The fee
will be effective April 1, 1981. * * *2
CLOSING THE ACCOUNT. Except where specific notice is
required by law, we can close your Account at any time
by phoning you or by writing you at the address shown
on our records. If you want to close your Account, you
must give us notice in writing. * * *
The agreement urges cardholders to read and retain a copy of
the agreement because “when you use your Account, you’ve agreed
to the terms in this agreement.”
The agreement also states that the cardholder may use the
card to buy goods and services wherever the card is honored and
to get cash advances in various ways; that petitioner will send a
periodic statement to the cardholder; that the cardholder should
notify petitioner if the card is lost or stolen; that the
cardholder may be liable for misuse of his or her card up to $50;
that the cardholder has certain rights under the Fair Credit
2
Similarly, petitioner’s cardholder agreement and Truth-in-
Lending Disclosure, effective September 1984, provided in part as
follows:
OTHER CHARGES. * * *
4. You agree to pay a non-refundable annual membership
fee of $15.00 in consideration of the issuance of your
Card and the establishment of your credit limit. The
membership fee will be charged on your Periodic
Statement each year in the month in which you opened
your account. For Commercial Accounts the annual
membership fee will be $36.00.
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Billing Act if there is a billing dispute; and that petitioner
may change the cardholder agreement at any time.
5. Petitioner’s Credit Card Services and Business Practices
All of petitioner’s MasterCard cardholders had available to
them the following from 1983 to 1985: Periodic itemized
statements of account activity, toll-free customer telephone
service, ATM access, prompt replacement of lost and stolen cards
and fraud protection,3 worldwide merchant acceptance, consumer
protection for purchases (i.e., if a cardholder has a problem
with goods or services bought with a credit card, he or she
generally has the right not to pay the remaining amount due after
trying in good faith to return the item or giving the merchant a
chance to correct the problem), free additional cards, a means of
identification, check access (petitioner provides checks bearing
a cardholder’s account number which the cardholder may use to buy
goods or services from merchants not honoring the card), credit
bureau reporting, processing of payments, changes in credit
limits, and verification of available credit when cardholders
used their cards. Petitioner provided additional services to
some of its cardholders: travel, accident, and rental car
insurance, rental car discounts, emergency cash or airline
3
Under Regulation Z, 12 C.F.R. sec. 226.12(b), the
cardholder may be required to pay the first $50 of unauthorized
use, but petitioner rarely did so. Petitioner asked MasterCard
cardholders who had unusual activity on their cards if their card
was lost or stolen.
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tickets, and credit card registration. Petitioner provided most
of these services before it imposed an annual membership fee.
Petitioner provided some services only if the cardholder used the
card to make a specific purchase, e.g., free collision insurance
with the rental of a car. Some of these services increased in
value after petitioner imposed the annual membership fee, e.g.,
the amount of accident insurance. Petitioner provided these
services year-round, although use of them varied seasonally.
Petitioner generally issued new MasterCards to its
cardholders every 2 years. Petitioner reissued cards evenly
throughout the year. Reissuance of a card did not necessarily
coincide with the date petitioner charged the annual membership
fee.
Petitioner established a customer's MasterCard credit limit
when petitioner approved a customer’s application for the
account. Thereafter, petitioner occasionally changed the credit
limit at a cardholder’s request. Petitioner sometimes raised
credit limits to accommodate cardholders and sometimes lowered
credit limits to reduce petitioner’s risk. Credit limit changes
were not related to the charging and payment of the annual
membership fee.
6. Petitioner’s Reporting of the Annual Membership Fees
Petitioner reported the annual membership fees it received
from 1983 to 1985 ratably over a 12-month period for Federal
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income tax, financial, accounting, and regulatory reporting
purposes. Petitioner reported about 50 to 75 percent of the
annual membership fees it received each year and deferred the
balance to the next year. Petitioner reported the deferred
portion as income in the following year for tax, financial, and
regulatory purposes.
7. Joint Venture Agreement
On March 26, 1986, petitioner and Fidelity Bank & Trust Co.
(Fidelity) signed a joint venture agreement under which: (a)
Fidelity agreed to market petitioner's MasterCards to some of its
customers, (b) petitioner agreed to service the accounts (send
periodic statements, receive and process payments, handle
merchant charge authorizations, respond to customer inquiries,
etc.), and (c) Fidelity and petitioner agreed to divide any
profits earned on the accounts. Petitioner estimated its
servicing costs based on its actual 1985 costs of servicing
MasterCard accounts and its budgeted 1986 costs. Under the
agreement, petitioner received a monthly servicing fee of $2 per
month per account or $24 per year for the first 12 months. After
the first 12 months, upon 60 days’ notice to Fidelity petitioner
could raise the monthly servicing fee to cover actual increases
in expenses in servicing the accounts.
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OPINION
1. Rev. Proc. 71-21, 1971-2 C.B. 549Petitioner argues that, under Rev. Proc. 71-21, 1971-2 C.B.
549, it may report its income from annual membership fees ratably
over a 12-month period on the grounds that the fees were for
services it performed ratably over that period.
Income must be reported in the taxable year in which the
taxpayer receives it, unless, under the taxpayer’s method of
accounting, the item of income is properly accounted for in a
different period. Sec. 451(a). Petitioner is an accrual method
taxpayer. An accrual method taxpayer recognizes income when all
the events have occurred which fix the right to receive the
income and the amount of the income can be determined with
reasonable accuracy. Schlude v. Commissioner, 372 U.S. 128, 137
(1963); secs. 1.446-1(c)(1)(ii), 1.451-1(a), Income Tax Regs.
Under Rev. Proc. 71-21, supra, an accrual basis taxpayer
that receives payments in one taxable year for services to be
performed not later than the next taxable year may, in certain
circumstances, include the payments in gross income ratably as
earned through the performance of the services, rather than when
received. Rev. Proc. 71-21, supra at 549-550, 1971-2 C.B. 549,
states in part:
Section 1. Purpose
The purpose of this Revenue Procedure is to
implement an administrative decision, made by the
Commissioner in the exercise of his discretion under
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section 446 of the Internal Revenue Code of 1954, to
allow accrual method taxpayers in certain specified and
limited circumstances to defer the inclusion in gross
income for Federal income tax purposes of payments
received (or amounts due and payable) in one taxable
year for services to be performed by the end of the
next succeeding taxable year. Amounts due and payable
are, for purposes of this Revenue Procedure, treated as
payments received.
Section 2. Background
In general, tax accounting requires that payments
received for services to be performed in the future
must be included in gross income in the taxable year of
receipt. However, this treatment varies from financial
accounting conventions consistently used by many
accrual method taxpayers in the treatment of payments
received in one taxable year for services to be
performed by them in the next succeeding taxable year.
The purpose of this Revenue Procedure is to reconcile
the tax and financial accounting treatment of such
payments in a large proportion of these cases without
permitting extended deferral in the time of including
such payments in gross income for Federal income tax
purposes. Such reconciliation will facilitate
reporting and verification of such items from the
standpoint of both the taxpayers affected and the
Internal Revenue Service.
Section 3. Permissible Methods
.01 An accrual method taxpayer who receives a
payment for services to be performed by him in the
future and who includes such payment in gross income in
the year of receipt is using a proper method of
accounting.
.02 An accrual method taxpayer who, pursuant to
an agreement (written or otherwise), receives a payment
in one taxable year for services, where all of the
services under such agreement are required by the
agreement as it exists at the end of the taxable year
of receipt to be performed by him before the end of the
next succeeding taxable year, may include such payment
in gross income as earned through the performance of
the services, subject to the limitations provided in
sections 3.07, 3.08, and 3.11. However, if the
inclusion in gross income of payments received is
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properly deferred under the preceding sentence and for
any reason a portion of such services is not performed
by the end of the next succeeding taxable year, the
amount allocable to the services not so performed must
be included in gross income in such next succeeding
year, regardless of when (if ever) such services are
performed.
* * * * * * *
.06 In any case in which an advance payment is
received pursuant to an agreement which requires the
taxpayer to perform contingent services, the amount of
an advance payment which is earned in a taxable year
through the performance of such services may be
determined (a) on a statistical basis if adequate data
are available to the taxpayer; (b) on a straight-line
ratable basis over the time period of the agreement if
it is not unreasonable to anticipate at the end of the
taxable year of receipt that a substantially ratable
portion of the services will be performed in the next
succeeding taxable year; or (c) by the use of any other
basis that in the opinion of the Commissioner, results
in a clear reflection of income.
* * * * * * *
.11 The amount of any advance payment includible
as gross receipts in gross income in the taxable year
of receipt by a taxpayer under the foregoing rules
shall be no less than the amount of such payment
included as gross receipts in gross income for purposes
of his books and records and all reports (including
consolidated financial statements) to shareholders,
partners, other proprietors or beneficiaries and for
credit purposes.
2. Whether Petitioner Performed Services for Cardholders
Ratably Over 12 Months
Petitioner points out that it performed many services for
its MasterCard cardholders throughout the year and contends that
it earned income from annual membership fees ratably over the 12-
month period covered by those fees. We disagree with
petitioner’s contention.
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The cardholder agreement states that the annual membership
fee is nonrefundable and is paid in consideration of opening an
account and establishing a credit limit. Petitioner performed
all of the acts that it was required to perform in order to be
entitled to the annual membership fee when it issued a credit
card to the customer and established a credit limit. Petitioner
does not deny that it can cancel a member’s credit card at any
time, or that its rights and obligations are anything other than
as stated in the cardholder agreement. Once petitioner opened an
account for a customer, petitioner had an unrestricted right to
that customer’s annual membership fee. Petitioner had no duty
under the agreement to return any part of the fee even if
petitioner or the cardholder closed the account immediately
thereafter.
Petitioner contends that it received the annual membership
fee in payment for numerous services it provided to cardholders
throughout the year. Petitioner’s contention might be well taken
if we disregard the cardholder agreement. Under the agreement,
all that petitioner was required to do to be entitled to keep the
nonrefundable annual membership fee was to issue a card and
establish a credit limit. Respondent contends that those actions
are not within the scope of Rev. Proc. 71-21, 1971-2 C.B. 549,
because they are not services. We need not decide respondent’s
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contention because, even if they are services, they are clearly
not provided ratably over the 12-month period.4
Petitioner views the annual membership fee as paid for the
various cardholder services. Petitioner contends that the cards
would be useless if it did not provide services such as
authorization of purchases, sending of statements, processing of
payments, responding to cardholder questions, and replacing lost
or stolen cards. We agree, but the cardholder agreement, written
by petitioner, clearly states the payment is for something other
than those services.
Petitioner argues that many services are “contemplated” by
the agreement. Petitioner points out that the agreement states
that the cardholder may use the card to buy goods and services
wherever the card is honored and to get cash advances in various
ways; that petitioner will send a periodic statement to the
cardholder; that the cardholder should notify petitioner if the
card is lost or stolen; that the cardholder may be liable for
misuse of his or her card up to $50; that the cardholder has
certain rights under the Fair Credit Billing Act if there is a
4
We do not decide whether annual membership fees must
be reported in the year of receipt if they are governed by
cardholder agreements which differ substantially from the ones
at issue here. As stated, the cardholder agreement at issue
here provides that the fee is nonrefundable and is paid in
consideration of issuance of the card and establishment of a
credit limit, and the card may be canceled at any time by
petitioner or the cardholder. Cf. Barnett Banks of Florida,
Inc. v. Commissioner, 106 T.C. ___ (1996), filed today.
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billing dispute; and that petitioner may change the cardholder
agreement at any time. However, the cardholder has no assurance
that those services will continue; petitioner can cancel the card
at any time without refunding the annual membership fee.
Similarly, petitioner argues that it should be allowed to
defer reporting the fees at issue here because they are called
“annual membership fees”. We disagree because the name of the
fee does not override (nor does petitioner contend that it
overrides) the provisions of the agreement that establish the
rights and obligations of the parties.
Petitioner argues that respondent’s reliance on the
cardholder agreement improperly places form over substance.
Under petitioner’s argument, the “substance” of the transaction
is that petitioner provides many services for cardholders
throughout the year, and the “form” of the transaction is found
in the cardholder agreement. We disagree. The cardholder
agreement establishes the rights of cardholders and the card
issuer. It provides that the payment is in consideration of the
issuance of the card and establishment of a credit limit. An
accrual method taxpayer recognizes income when all of the events
have occurred which fix the right to receive the income. Secs.
1.446-1(c)(1)(ii), 1.451-1(a), Income Tax Regs. Contrary
to petitioner’s contention, the rights and obligations of the
parties are the substance of the matter. Even though petitioner
urged cardholders to read and retain a copy of the agreement
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(because “when you use your Account you’ve agreed to the terms in
this agreement”), petitioner in effect argues here that it is not
so important after all.
Petitioner points out that Rev. Proc. 71-21, supra, says
that services must be provided by the close of the taxable year
following the year of payment and that it does not say that the
agreement must require services to be performed in the later
year. Petitioner’s point is literally true, but it is at best
misleading. First, to allow deferral of reporting of income to a
time later than all the events occurred which fix the taxpayer’s
right to receive the income is contrary to undisputed accrual
accounting principles. See secs. 1.446-1(c)(1)(ii), 1.451-1(a),
Income Tax Regs. Second, Rev. Proc. 71-21, supra, allows income
to be reported in the next taxable year “as earned through the
performance of * * * services”. Rev. Proc. 71-21, sec. 3.02. It
is inherent in this language that petitioner must show that the
payment was made at least in part for services to be performed in
the next taxable year. See also id. secs. 1 and 2. As discussed
above, the cardholder agreement clearly establishes that this is
not the case here.
Petitioner reissued credit cards evenly throughout the year,
and reissuance did not necessarily coincide with the date
petitioner charged the annual membership fee. However,
petitioner has not shown that one of the acts for which the
annual membership fee was paid--the issuance of a card--occurred
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after payment of the fee. On the contrary, the required act--the
issuance of a card--probably always or almost always occurred
before payment of the annual membership fee. An example may help
to illustrate this point. Assume petitioner issues a new card on
March 1 and bills for the annual membership fee on October 1.
In that situation, issuance of the card precedes payment of the
annual membership fee. Thus, when the fee is paid, petitioner
has already performed one of the acts required by the cardholder
agreement, lending no support to reporting the income after the
petitioner receives the fee. The same point would apply if the
card were issued for more than 1 year, as was petitioner’s
general practice for MasterCards.
Now assume petitioner does not issue a card to a new
customer until after the customer pays the annual membership fee.
In that case, assuming that issuance of a card is a service under
Rev. Proc. 71-21, supra, petitioner might not be required to
report the fee income until it issues the card because it is an
act required by the cardholder agreement. This latter example
has no bearing on this case, however, because petitioner did not
show (or try to show) that it delayed initial issuance of a
credit card until after it received annual membership fees from
any customers.
Petitioner argues that, under section 3.06(b) of Rev. Proc.
71-21, supra, it may treat the annual membership fee as earned
ratably over the membership year because it was “not unreasonable
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to anticipate at the end of the taxable year of receipt that a
substantially ratable portion of the services will be performed
in the next succeeding taxable year”. Sec. 3.06(b) of Rev. Proc.
71-21, supra at 549. Petitioner argues that most of the services
it provides are contingent on whether a cardholder uses a card.
We disagree that petitioner qualifies under section 3.06(b)
of Rev. Proc. 71-21, supra. That section applies if a taxpayer
receives an advance payment pursuant to an agreement which
requires the taxpayer to perform contingent services on a
continuing basis in order to earn the payment. Sec. 3.06, Rev.
Proc. 71-21, supra. The cardholder agreement does not require
petitioner to perform contingent services of that kind. It
requires petitioner to issue a card and establish a credit limit.
Once petitioner does those things, petitioner may close an
account at any time.
Petitioner cites Cozine & Showfety, “Advance Payments for
Goods and Services”, 2 Tax Adviser 602 (1971); and Sobeloff, “New
Prepaid Income Rules: IRS Reversal of Position Will Aid Many
Taxpayers”, 33 J. Taxn. 194 (1970). These articles are useful
discussions of Rev. Proc. 70-21, 1970-2 C.B. 501, and Rev. Proc.
71-21, supra, but they do not give any reason for us to agree
with petitioner on the issue in dispute here.
Petitioner points out that respondent has ruled that the
merchant discount earned by a bank operating a credit card plan
is service income which a cash basis bank should include in
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income as payments when received from cardholders on their
accounts, Rev. Rul. 78-40, 1978-1 C.B. 136, and which an accrual
method bank should include in income as it makes remittances to
the merchants. Rev. Rul. 71-365, 1971-2 C.B. 219. Those rulings
are entirely consistent with our holding here because they
require cash basis banks to report income when received and
accrual basis banks to report income under the all events test.
3. Relationship to Regulatory and Financial Accounting
Petitioner reported annual membership fees ratably over 12-
month membership years for financial accounting, shareholder
reporting, and regulatory reporting purposes from 1981 through
the years in issue. Petitioner contends that this treatment is
authorized for banks that charge periodic fees to credit card
holders by an audit guide prepared by the Banking Committee of
the American Institute of Certified Public Accountants and by
Instructions to the Consolidated Reports of Condition and Income
(Call Reports) issued in 1983 by the Federal Financial
Institutions Examination Council for use by the three Federal
banking agencies, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, and the Office
of the Comptroller of the Currency. Petitioner argues that its
reporting for those purposes supports its identical reporting for
income tax purposes. We disagree. Petitioner’s deferral of
cardholder income for financial accounting, regulatory, or other
purposes does not determine the proper Federal income tax
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treatment. Thor Power Tool Co. v. Commissioner, 439 U.S. 522,
540-541 (1979). Although generally accepted accounting practices
may generally be used for tax accounting purposes, the taxpayer’s
use of a method of accounting is “expressly limited to cases
where the Commissioner believes that the accounts clearly reflect
the net income.” Lucas v. American Code Co., 280 U.S. 445, 449
(1930); see American Auto. Association v. United States, 367 U.S.
687, 693 (1961). A transaction need not be characterized the
same for financial accounting purposes and for tax purposes.
Frank Lyon Co. v. United States, 435 U.S. 561, 577 (1978).
To reflect concessions,
Decision will be entered
under Rule 155.