IRS Did Not Abuse Discretion in Denying Accounting Method Change for Credit Card Fee Income.

• Author: Weinberger, Mark

The Court of Federal Claims ruled that the IRS did not abuse its discretion by denying a request by American Express (AMEX) to change its method of accounting for annual credit card fee income (American Express Co., 47 Fed. Cl. 127 (2000)).

In 1987, AMEX requested the Service's consent to change its accounting method for annual credit card fee income from recognizing income on receipt to ratably including it over 12 months (as required by FASB Statement No. 91). The change was requested under Rev. Proc. 71-21, which allows deferred income recognition of payments received in one tax year for services to be performed in the following tax year. When the IRS denied the request, AMEX filed a refund claim. After the Service failed to act on the refund claim, AMEX petitioned the court for a refund, claiming the denial was an abuse of the IRS's discretion. The Court of Federal Claims held in favor of the Service on cross-motions for summary judgment.

Many credit card issuers have already addressed the tax treatment of annual credit card fee income. Like AMEX, credit card issuers that have attempted to defer recognition of fee income by requesting an accounting method change have likely experienced IRS resistance to such changes, despite Tax Court authority to the contrary.

In American Express, the court reasoned that the Service "enjoys broad discretion to determine whether a taxpayer's accounting methods clearly reflect income ... and [the] exercise of this discretion must be upheld unless it is clearly unlawful." The court ruled that AMEX did not meet its burden of "persuading the court that the Service's decision was an abuse of discretion or clearly unlawful."

The court noted that GCM 39434 explained the IRS's position that annual credit card fees do not fit within the exception provided by Rev. Proc. 71-21, because they do not constitute payment for services. AMEX argued that GCM 39434 should be given no deference, because it merely stated the Service's litigating position and did not otherwise have precedential value. The court agreed that a general counsel memorandum is not authoritative precedent, but nevertheless held that the IRS could have reasonably used GCM 39434 for legal guidance. Accordingly, the court...