American Express v. United States

• Decision Date: 23 August 2001
• Docket Number: PLAINTIFF-APPELLANT,DEFENDANT-APPELLEE,No. 00-5111,00-5111
• Parties: (Fed. Cir. 2001) AMERICAN EXPRESS COMPANY AND AFFILIATED SUBSIDIARIES,, v. UNITED STATES,
• Court: U.S. Court of Appeals — Federal Circuit

Page 1376

262 F.3d 1376 (Fed. Cir. 2001)

AMERICAN EXPRESS COMPANY AND AFFILIATED SUBSIDIARIES, PLAINTIFF-APPELLANT, v. UNITED STATES, DEFENDANT-APPELLEE.

No. 00-5111

United States Court of Appeals for the Federal Circuit

August 23, 2001

Appealed from: United States Court of Federal Claims

Stephen D. Gardner, Kronish Lieb Weiner & Hellman Llp, of New York, New York, argued for plaintiff-appellant. With him on the brief was Phillip Gall.

Steven I. Frahm, Attorney, Tax Division, Department of Justice, of Washington, Dc, argued for defendant-appellee. With him on the brief was Richard Farber, Attorney.

Before Newman, Gajarsa, and Dyk, Circuit Judges.

Dyk, Circuit Judge.

This case presents a simple issue with significant monetary consequences -- whether the Internal Revenue Service ("IRS") properly construed the term "services" appearing in Revenue Procedure 71-21, 1971-2 C.B. 549 to exclude annual cardholder payments to American Express for credit commitment, insurance, and luggage tags. We defer to the IRS's reasonable interpretation of its own Revenue Procedure that payments for credit are not for services. Although some portion of the annual cardholder payments were made for services, even under the IRS interpretation of the term, American Express does not challenge the IRS's refusal to accept American Express's attempt to segregate this services portion from the portion that was not for services. Therefore, all the revenue from the fees was properly required to be reported in the year it was received. We accordingly affirm the decision of the Court of Federal Claims denying the refund sought by American Express for the 1987 tax year.

BACKGROUND

In 1987, American Express issued charge cards which entitled the cardholders to certain financial and travel-related products and services, insurance, and credit. Like virtually all corporations, American Express is an accrual basis taxpayer rather than a cash basis taxpayer. Under the ordinary tax accounting rules governing the reporting of income, the annual fee payments it receives from cardholders are reported as income when earned. Since it receives annual fee payments throughout the year, and the annual fee covers an entire year, one might assume that the fees necessarily were earned partially in the year of payment and partially in the next year. The analysis under the Internal Revenue Code ("I.R.C." or "Code") is, however, more complicated.

Section 446 of the Code provides the Commissioner of the IRS ("Commissioner") with broad discretion to preclude a taxpayer from using a method of accounting that does not clearly reflect income and to require a taxpayer to use a method of accounting that, in the Commissioner's opinion, does clearly reflect income. ¹ Acting under that authority, the Commissioner has required accrual basis taxpayers to include prepaid fees as income in the year they were received. The Commissioner reasoned that at the time the taxpayer received the fees, all events had occurred that established the taxpayer's right to the income. Treas. Reg. §§1.446-1(c)(ii); see also Auto. Club of Mich. v. United States, 353 U.S. 180, 188-89 (1957). In Automobile Club of Michigan, 353 U.S. at 184, American Automobile Association v. United States, 367 U.S. 687, 697-98 (1961), and Schlude v. Commissioner, 372 U.S. 128, 133-134 (1963), the Supreme Court upheld the Commissioner's authority under §§ 446(b) to require a taxpayer to include income attributable to prepaid fees in the year of receipt.

In 1971, responding to taxpayer concerns about the claimed unfairness of the current year tax accounting of prepaid income, the Commissioner, acting under the authority of §§ 446 of the Code, issued Rev. Proc. 71-21, 1971-2 C.B. 549 ² to "allow accrual method taxpayers in certain specified and limited circumstances to defer the inclusion of gross income . . . of payments received . . . in one taxable year for services to be performed by the end of the next succeeding taxable year." Rev. Proc. 71-21 §§ 1 (emphasis added). Under Rev. Proc. 71-21 §§ 3.14, if a taxpayer satisfies the requirements of Rev. Proc. 71-21, then "the deferral of the inclusion of gross income . . . will be treated as an acceptable method of accounting under section 446 of the Code . . . ." No deferral is permitted for income that does not represent payment for services.

Until the 1987 tax year, American Express reported the full amount of one-time annual fee payments from cardholders as income in the month they were billed. On January 1, 1987, American Express changed its financial accounting method to a "Ratable Inclusion Method," under which one-twelfth of the annual fee payments was included as income in the month the fee was billed and in each of the following 11 months. This change apparently coincided with a change in accounting standards to permit such a deferral. Financial Accounting Standards Board of the Financial Accounting Foundation, Statement of Financial Accounting Standards No. 91 (Dec. 1986). ³ On June 26, 1987, American Express filed Applications for Change in Method of Accounting (Forms 3115) with the IRS requesting permission to use the Ratable Inclusion Method for income tax accounting purposes but continued to report cardholder annual fee payments it billed in 1987 as income in the 1987 tax year.

The IRS took the position that "[t]he portion of the [annual] fees attributable to credit and goods are not deferrable under Rev. Proc. 71-21 because the revenue procedure applies only to advance payments for services performed by the taxpayer and credit and goods are not services." Letter from Paul M. Ritenour, Chief Branch 8, IRS, to Daniel B. Rosenbaum, esq., Outside Counsel to American Express 3 (August 30, 1989). The IRS relied in part on General Counsel Memorandum (G.C.M.) 39,434, 1985 IRS GCM LEXIS 99, in which the IRS had previously interpreted bank credit card fees to represent loan commitment fees for a property right -- the right to use money -- rather than a fee for services. The IRS offered American Express the opportunity to segregate payments for items that were not services, so that the services portion could be deferred pursuant to the Revenue Procedure, but unless American Express could make an adequate segregation, the IRS required that "the entire annual card fee must be included in the taxpayers' gross income in the tax year in which the fees are received." Letter from Mr. Ritenour at 3. American Express tried but failed to convince the IRS that its proposed segregation was satisfactory.

In 1996, American Express filed a timely claim for refund of income taxes for the 1987 tax year based on the requested change in accounting method. The IRS denied the refund, and American Express filed suit in the Court of Federal Claims on or about September 15, 1997. Based on stipulated facts, the parties cross-moved for summary judgment. On June 30, 2000, the Court of Federal Claims denied the refund and granted the IRS's motion for summary judgment because "G.C.M. 39,434 and the text of Rev. Proc. 71-21 provide[d] an adequate basis in law for the Commissioner's decision that the card fees in issue did not fall within the specified and limited circumstances of Rev. Proc. 71-21." Am. Express Co. v. United States, 47 Fed. Cl. 127, 133 (2000). In other words, the court held that "[t]he text of Rev. Proc. 71-21 is not in conflict with the Commissioner's determination that the card fees were not paid for services and therefore could not be ratably included in gross income," id. at 132, and that "G.C.M. 39,434 could have reasonably been used by the Commissioner for legal guidance in reaching his decision in this case that card fees were not payment for services under Rev. Proc. 71-21." Id. at 133. American Express timely appealed to this court.

DISCUSSION

This case involves no issue of statutory construction. Nor does it involve any questions as to the validity of the Revenue Procedure, which is plainly statutorily authorized. See I.R.C. §§ 446(b); United States v. Mead Corp., 121 S. Ct. 2164, 2171 (2001). Rather, the sole issue is whether the IRS properly interpreted its own Revenue Procedure.

We consider first whether the IRS properly interpreted the Procedure's reference to services as not including fees for the acquisition of credit. The credit float feature -- that is, the ability to charge purchases and to pay later -- is a common feature of all of the cards involved. ⁴

There is nothing on the face of IRS Rev. Proc. 71-21 that defines the term "services," and American Express offers no dictionary definition that tells us, one way or the other, whether the extension of credit constitutes a form of service. ⁵ American Express relies on a footnote in the Supreme Court's American Automobile Association decision, describing "services" offered by the taxpayer to "include furnishing road maps, routing, tour books, etc.; emergency road service through contracts with local garages; bail bond protection; personal automobile accident insurance and theft protection; . . . motor license procurement, brake and headlight adjustment service, notarial duties and advice in the prosecution of small claims." 367 U.S. at 689 n.2 (1961). American Express contends that the term "services" in Rev. Proc. 71-21 must be construed to include credit, because it is similar to the listed items. However, although the American Automobile Association case was an important predicate to the issuance of Rev. Proc. 71-21, the Supreme Court has suggested that we should not place undue weight on statements appearing in footnotes. CBS, Inc. v. Fed. Communication Comm'n, 453 U.S. 367, 385 (1981); Rivet v. Regions Bank, 522 U.S. 470, 477 (1998). There is no indication that the IRS intended to adopt the Supreme Court's definition in its Revenue Procedure. Indeed, the stated purpose of Rev. Proc. 71-21 was to "implement an administrative decision, made by the Commisioner in the exercise of his...