Menu
Tax Notes logo

Taxpayer Files Reply Brief in Appeal of Tax Court Decision on Accounting Method Changes

JAN. 28, 2011

Capital One Financial Corp. et al. v. Commissioner

DATED JAN. 28, 2011
DOCUMENT ATTRIBUTES
  • Case Name
    CAPITAL ONE FINANCIAL CORPORATION AND SUBSIDIARIES, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
  • Court
    United States Court of Appeals for the Fourth Circuit
  • Docket
    No. 10-1788
  • Authors
    Pawlow, Jean A.
    Erickson, Elizabeth
    Spencer, Kevin
  • Institutional Authors
    McDermott Will & Emery LLP
  • Cross-Reference
    For the Tax Court decision in Capital One Financial Corp. v.

    Commissioner, 130 T.C. No. 11 (May 22, 2008), see Doc

    2008-11463 or 2008 TNT 101-13 2008 TNT 101-13: Court Opinions.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2011-10174
  • Tax Analysts Electronic Citation
    2011 TNT 92-16

Capital One Financial Corp. et al. v. Commissioner

 

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

 

 

On Appeal from the Decision of

 

The United States Tax Court

 

Docket No. 24260-05

 

The Honorable Harry A. Haines

 

 

REPLY BRIEF OF APPELLANT

 

 

Jean A. Pawlow

 

Elizabeth Erickson

 

Kevin Spencer

 

McDermott Will & Emery LLP

 

600 Thirteenth Street, N.W.

 

Washington, DC 20005-3096

 

(202) 756-8000

 

Attorneys for Petitioner-Appellant

 

Capital One Financial Corporation

 

 

                          TABLE OF CONTENTS

 

 

 TABLE OF AUTHORITIES

 

 

 GLOSSARY OF TERMS

 

 

 ARGUMENT

 

 

      A. Late Fees Issue

 

 

           1. The plain language of TRA § 1004 controls the

 

           disposition of this case; Congress deemed consent for

 

           taxpayers required to report credit card income as OID

 

 

           2. The "consent" requirement is not limitless

 

 

           3. Capital One is willing to make a Section 481 adjustment

 

           to "prevent amounts from being duplicated or omitted."

 

 

           4. Capital One is not seeking a "retroactive" accounting

 

           method change; Capital One is seeking to comply with

 

           Section 1272(a)(6)(C)(iii)

 

 

           5. Asserting that Late Fees should be treated as OID in the

 

           Amended Petition is in line with the Tax Court's

 

           jurisdiction

 

 

           6. Capital One did not adopt a method of accounting for

 

           Late Fees other than as OID, which it admittedly improperly

 

           implemented due to a lack of IRS guidance

 

 

           7. Late Fees are not an "item of income" separate and

 

           distinct from OID for which Capital One needed to obtain

 

           specific and special consent

 

 

           8. The IRS should not be permitted to keep Capital One from

 

           reporting Late Fees properly simply because it does not

 

           like the result

 

 

      B. Rewards Issue

 

 

           1. There is no rational basis to treat lending money

 

           differently from providing services for purposes of

 

           Regulation § 1.451-4

 

 

                a. The Government's litigating position in this case

 

                should not be accorded any deference

 

 

           2. Application of Regulation § 1.451-4 more clearly

 

           reflects Capital One's annual income generated from the

 

           MilesOne Program

 

 

                a. There are at least three sources of income against

 

                which Capital One "matches" the expense associated

 

                with issuing MilesOne miles

 

 

 CONCLUSION

 

 

 CERTIFICATE OF COMPLIANCE WITH STYLE AND LENGTH LIMITATIONS

 

 

 ADDENDUM

 

 

 CERTIFICATE OF SERVICE

 

 

                         TABLE OF AUTHORITIES

 

 

 Cases

 

 

 Barber v. Comm'r, 64 T.C. 314 (1975)

 

 

 Black & Decker Corp. v. Comm'r, 986 F.2d 60 (4th Cir. 1993)

 

 

 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)

 

 

 Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1988)

 

 

 Burlington Truck Lines, Inc. v. United States, 371 U.S. 156

 

 (1962)

 

 

 Color Arts, Inc. v. Comm'r, T.C. Memo. 2003-95

 

 

 Commissioner v. O. Liquidating Corp., 292 F.2d 225 (3d Cir.

 

 1961)

 

 

 Convergent Tech., Inc. v. Comm'r, 70 T.C.M. (CCH) 87 (1995)

 

 

 Diebold, Inc. v. United States, 891 F.2d 1579 (Fed. Cir. 1989)

 

 

 Douthit v. United States, 299 F.Supp. 397 (W.D. Tenn. 1969),

 

 rev'd on other grounds, 432 F.2d 83 (6th Cir. 1970)

 

 

 Fisher v. Comm'r, 96 T.C.M. (CCH) 339 (2008)

 

 

 Foley v. Comm'r, 56 T.C. 765 (1971)

 

 

 FPL Group, Inc. v. Comm'r, 115 T.C. 554 (2000)

 

 

 Gitlitz v. Comm'r, 531 U.S. 206 (2001)

 

 

 Gose v. United States, 451 F.3d 831 (Fed. Cir. 2006)

 

 

 Griffin v. Oceanic Contractors, Inc., 458 U.S. 564 (1982)

 

 

 Hallmark Cards, Inc. v. Comm'r, 90 T.C. 26 (1988)

 

 

 Hayutin v. Comm'r, 508 F.2d 462 (10th Cir. 1974)

 

 

 Hinkleman v. Shell Oil Co., 962 F.2d 372 (4th Cir. 1992)

 

 

 Huffman v. Comm'r, 126 T.C. 322 (2006)

 

 

 Inv. Co. Inst. v. Camp, 401 U.S. 617 (1971)

 

 

 Knapp v. Comm'r, 867 F.2d 749 (2d Cir. 1989)

 

 

 Leonhart v. Comm'r, 27 T.C.M. (CCH) 443 (1968), aff'd,

 

 414 F.2d 749 (4th Cir. 1969)

 

 

 Maid-Rite Steak Co., Inc. v. United States, 643 F. Supp. 1162

 

 (M.D. Pa. 1986)

 

 

 Mamula v. Comm'r, 346 F.2d 1016 (9th Cir. 1965)

 

 

 Miles v. Apex Marine Corp., 498 U.S. 19 (1990)

 

 

 Mooney Aircraft, Inc. v. United States, 420 F.2d 400 (5th Cir.

 

 1969)

 

 

 Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992)

 

 

 Morton v. Mancari, 417 U.S. 535 (1974)

 

 

 Naftel v. Comm'r, 85 T.C. 527 (1985)

 

 

 Nat'l Bank of Ft. Benning v. United States, 44 A.F.T.R. 2d

 

 6061 (M.D. Ga. 1979)

 

 

 Pacific Ent. v. Comm'r, 101 T.C. 1 (1993)

 

 

 Peters v. United States, 618 F.2d 125 (Ct. Cl. 1979)

 

 

 Prabel v. Comm'r, 91 T.C. 1101 (1988)

 

 

 Russell v. United States, 592 F.2d 1069 (9th Cir. 1979)

 

 

 S. Rossin & Sons v. Comm'r, 113 F.2d 652 (2d Cir. 1940)

 

 

 Sec. Ben. Life Ins. Co. v. United States, 517 F. Supp. 740 (D.

 

 Kan. 1980)

 

 

 Silver Queen Motel v. Comm'r, 55 T.C. 1101 (1971),

 

 acq., 1972-2 C.B. 3 (I.R.S. 1972)

 

 

 Skidmore v. Swift & Co., 323 U.S. 134 (1944)

 

 

 SoRelle v. Comm'r, 22 T.C. 459 (1954)

 

 

 Southern Pacific Transp. Co. v. Comm'r, 75 T.C. 497 (1980)

 

 

 Standard Oil Co. v. Comm'r, 77 T.C. 349 (1981)

 

 

 Sunoco, Inc. v. Comm'r, 87 T.C.M. (CCH) 937 (2004)

 

 

 United States v. Mead Corp., 533 U.S. 218 (2001)

 

 

 United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989)

 

 

 Watt v. Alaska, 451 U.S. 259 (1981)

 

 

 Wayne Bolt and Nut Co. v. Comm'r, 93 T.C. 500 (1989)

 

 

 Witte v. Comm'r, 513 F.2d 391 (D.C. Cir. 1975)

 

 

 Wright Contracting Co. v. Comm'r, 36 T.C. 620 (1961)

 

 

 Statutes

 

 

 I.R.C. Section 61

 

 

 I.R.C. Section 162

 

 

 I.R.C. Section 167

 

 

 I.R.C. Section 446(e)

 

 

 I.R.C. Section 471

 

 

 I.R.C. Section 481

 

 

 I.R.C. Section 1272(a)(6)(C)

 

 

 I.R.C. Section 6501

 

 

 TRA § 1004

 

 

 TRA § 1004(b)

 

 

 TRA § 1004(b)(2)

 

 

 Regulations

 

 

 Regulation § 1.446-1(e)(2)(ii)(a)

 

 

 Regulation § 1.446-1(e)(2)(ii)(b)

 

 

 Regulation § 1.446-1(e)(2)(iii)

 

 

 Regulation § 1.451-4

 

 

 Prop. Reg. § 1.446-1(e)(2)(ii)(a), 33 Fed. Reg. 18936 (Dec. 19,

 

 1968)

 

 

 IRS Guidance

 

 

 Revenue Ruling 72-491, 1972-2 C.B. 104

 

 

 Revenue Ruling 73-415, 1973-2 C.B. 154

 

 

 Revenue Ruling 74-69, 1974-1 C.B. 113

 

 

 Revenue Ruling 78-212, 1978-1 C.B. 139

 

 

 Revenue Ruling 78-97, 1978-1 C.B. 139

 

 

 Revenue Procedure 2004-33, 2004-22 I.R.B. 989

 

 

 I.R.S. Notice 97-67, 1997-2 C.B. 330

 

 

 I.R.S. General Counsel Memorandum 37221 (Aug. 18, 1977)

 

 

 I.R.S. General Counsel Memorandum 35524 (Oct. 19, 1973)

 

 

 I.R.S. General Counsel Memorandum 33837 (May 31, 1968)

 

 

 I.R.S. Field Service Advice 200102004 (Aug. 14, 2000)

 

 

 I.R.S. Field Service Advice 200145013 (Aug. 3, 2001)

 

 

 Internal Revenue Manual 4.11.6.6 (May 13, 2005)

 

 

 Internal Revenue Manual 4.43.1.12.6.5 (Jul. 23, 2009)

 

 

 Other Authorities

 

 

 Uniform Commercial Code

 

 

 Eugene Seago, Jerome Horvitz, and Frank Linton, When Is the

 

 Correction of an Error a Change in Taxpayer's Method of

 

 Accounting?, 73 J. Tax'n 76, Aug. 1990

 

 

                          GLOSSARY OF TERMS

 

 

 Annual Membership Fees     Fees charged to credit card customers

 

                            annually for the privilege of accessing

 

                            credit provided by Capital One.

 

 

 App.                       Joint Appendix

 

 

 Capital One                Capital One Financial Corporation and

 

                            Subsidiaries

 

 

 Cash Advance Fees          Fees charged to credit card customers when

 

                            customers access cash using their credit

 

                            cards

 

 

 C.Br.                      Brief of Appellant, Capital One

 

 

 G.Br.                      Brief of Appellee, the Government

 

 

 Interchange Fees           Income earned when Capital One, as

 

                            "issuing bank," reimburses the merchant

 

                            (indirectly through an "acquiring bank")

 

                            by paying the amount of the credit card

 

                            purchase less a discount

 

 

 IRS                        Internal Revenue Service

 

 

 Late Fees                  Fees charged to credit card customers who

 

                            are late in making payments

 

 

 OID                        Original Issue Discount

 

 

 Overlimit Fees             Fees charged to credit card customers who

 

                            exceed their credit limit

 

 

 Regulation                 Treasury Regulation (26 C.F.R.)

 

 

 Section                    Internal Revenue Code of 1986, as amended

 

                            (26 U.S.C.)

 

 

 Tax Court                  United States Tax Court

 

 

 The Government             Appellee, the Commissioner of Internal

 

                            Revenue

 

 

 TRA                        Taxpayer Relief Act of 1997, Pub. L. No.

 

                            105-34, 111 Stat. 788 (1997)

 

ARGUMENT

 

 

A. Late Fees Issue

As proof that its position is legally sound, the Government leads a "parade of horribles" before this Court, arguing that "[i]f taxpayers' contrary position were accepted, taxpayers generally would be free to file ambiguous, overbroad applications for a change in accounting method, and then decide many years later, with the benefit of hindsight, which income to include in the change." [G.Br. 44].

In this case, Capital One is seeking to employ the method of accounting dictated by Congress, and is willing to make any required Section 481 adjustment. The IRS is trying to keep Capital One on an admittedly incorrect method because, under these unique facts, Capital One will defer Late Fee income as contemplated (and required) by Congress. Here, the IRS is withholding its "consent" as a sword.

The Government's position is incorrect, untenable, and unfair. Starting in 1998, Capital One had no choice but to account and report Late Fees as OID. Capital One should be permitted to report Late Fees correctly for 1998 and 1999.

 

1. The plain language of TRA § 1004 controls the disposition of this case; Congress deemed consent for taxpayers required to report credit card income as OID.

 

The Government argues that the enacting language to Section 1272(a)(6)(C)(iii) is meaningless surplusage that can be ignored. [G.Br. 35]. The Government complains that Capital One's reading of the statute is inconsistent with Section 446(e).

The Government never addresses the plain language of TRA § 1004(b) other than to argue that it does not apply because it was not codified. [G.Br. 35]. "The plain meaning of legislation should be conclusive, except in the 'rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'" United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1989), citing Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982). Here, Congress understood that taxpayers like Capital One had no choice; taxpayers under these circumstances do not need IRS consent, they have Congress' mandate.

To support its position that Congress did not mean what it said, the Government argues that TRA § 1004(b)(2) only contemplated that "taxpayers would comply with automatic-consent procedures to be issued by the IRS," referencing a notice in a footnote to the Joint Committee on Taxation's explanation of the enactment. [G.Br. 36]. IRS Notice 97-67, 1997-2 C.B. 330, as referenced in that footnote, also explains:

 

For any requests filed on or after August 5, 1997 (the date of the enactment of the Act), the Service will exercise its discretion to deny requests to change a method of accounting for grace period interest other than the method required by section 1004 of the Act. See § 446(e) of the Internal Revenue Code. See also Conf. Rep. 220, 105th Cong., 1st Sess. 523 (1997); H.R. Rep. No. 148, 105th Cong., 1st Sess. 457 (1997).

 

(Emphasis added). Taxpayers needed only to seek consent for method changes other than as required by Section 1272(a)(C)(6)(iii).

The Government is also incorrect that the Tax Court's reading of TRA § 1004(b)(2) out of the existence is somehow in harmony with Section 446(e). [G.Br. 38]. Section 446(e) was enacted in 1954; TRA § 1004(b)(2) was enacted in 1997. The general rule of statutory construction would give effect to the statute that was enacted later in time. See Watt v. Alaska, 451 U.S. 259, 266 (1981). Because Congress is presumed to know existing law when it enacts legislation, Congress' intent here is express and clear. See Miles v. Apex Marine Corp., 498 U.S. 19, 32 (1990).

TRA § 1004(b)(2) eliminated the consent requirement for a limited subset of taxpayers after the enactment of Section 1272(a)(6)(C)(iii). Section 446(e), on the other hand, provides the general rule that IRS consent is required to make accounting method changes. "Where there is no clear intention otherwise, a specific statute will not be controlled or nullified by a general one, regardless of the priority of enactment." Morton v. Mancari, 417 U.S. 535, 550-511 (1974); see also Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384 (1992) ("[I]t is a commonplace of statutory construction that the specific governs the general.") If Congress wanted taxpayers to jump through the hoops of also seeking IRS consent, Congress would have said so.

 

2. The "consent" requirement is not limitless.

 

The Government argues that in essence, the consent requirement knows no bounds. [G.Br. 15]. This is not true. Indeed, where a taxpayer changes his accounting method without consent, the IRS can and has accepted that change, even when the change was retroactive. See, e.g., Barber v. Comm'r, 64 T.C. 314 (1975). IRS consent can also be inferred from the circumstances. See, e.g., S. Rossin & Sons v. Comm'r, 113 F.2d 652 (2d Cir. 1940). Where a taxpayer requests to change from an improper to a proper method of accounting, the IRS's discretion is limited. See Nat'l Bank of Ft. Benning v. United States, 44 A.F.T.R.2d 6061 (M.D. Ga. 1979), Sec. Ben. Life Ins. Co. v. United States, 517 F. Supp. 740 (D. Kan. 1980); Wright Contracting Co. v. Comm'r, 36 T.C. 620 (1961). The IRS cannot require a taxpayer to change from "one incorrect to another incorrect method." See Sunoco, Inc. v. Comm'r, 87 T.C.M. (CCH) 937 (2004); see also Prabel v. Comm'r, 91 T.C. 1101, 1112 (1988); Hallmark Cards, Inc. v. Comm'r, 90 T.C. 26, 31, (1988). Similarly, the IRS cannot compel a taxpayer to remain on an improper method of accounting. See SoRelle v. Comm'r, 22 T.C. 459 (1954); Douthit v. United States, 299 F.Supp. 397 (W.D. Tenn. 1969), rev'd on other grounds, 432 F.2d 83 (6th Cir. 1970).

The Government is also incorrect that filing Form 3115 is the only way to obtain consent to change accounting methods. [G.Br. 17]. In fact, the IRS's own Internal Revenue Manual contemplates at least three methods by which taxpayers may secure "consent:"

 

a. Special procedures established by statutes, regulations or IRS publications

b. Automatic consent procedures (Rev. Proc. 2002-9 and successors)

c. Advance consent procedures (Rev. Proc. 97-27 and successors)

 

I.R.M. 4.11.6.6 (May 13, 2005) (emphasis added). In this case, Congress has expressly provided a special rule deeming consent for taxpayers that are required to change their accounting method because of the enactment of Section 1272(a)(6)(C)(iii).

 

3. Capital One is willing to make a Section 481 adjustment to "prevent amounts from being duplicated or omitted."

 

The Government states that the purpose of the "consent requirement" embodied in Section 446(e) is to: (1) condition consent on the taxpayer's agreement to make correcting Section 481 adjustments to prevent distortions of income; and (2) reduce the administrative burden of detecting accounting method changes and reviewing the associated adjustments. [G.Br. 16]. These concerns, however, are not implicated in this case. Capital One is willing to make any necessary Section 481 adjustment occasioned by treating Late Fees in 1998 and 1999 as OID, as it did on its original tax returns for Interchange Fees and Overlimit Fees.

Similarly, there is no issue concerning "detecting" Capital One's treatment of Late Fees. Capital One filed Form 3115 stating that:

 

The pool of debt instruments consists of all credit card receivables held by the taxpayer. The proposed method is to account for interest and OID as required by Section 1272(a)(6).

 

[App. 319, 328]. Since Capital One filed its 1998 tax return, the IRS has had notice that Capital One was attempting to comply with Section 1272(a)(6)(C)(iii).

 

4. Capital One is not seeking a "retroactive" accounting method change; Capital One is seeking to comply with Section 1272(a)(6)(C)(iii).

 

The Government complains that Capital One is seeking to make an impermissible, "retroactive" method change for Late Fees. [G.Br. 21]. To the contrary, Capital One is attempting to comply with Section 1272(a)(6)(C)(iii) for the first two years of the statute's enactment, which are before this Court and not limited by the statute of limitations on assessment in Section 6501. There is no administrative burden or uncertainty that would arise as a result of treating Late Fees correctly as OID.

None of the cases cited by the Government present situations even remotely similar to this case. For example, in Diebold, Inc. v. United States, 891 F.2d 1579, 1582 (Fed. Cir. 1989), the court explained that "Diebold does not seek to account for the replacement modules in the same manner that it accounts for other similar items or to correct the omission of an item from a method of accounting that it otherwise consistently applies to a single category of related items." The Diebold court explained that Section 446(e) "prohibits taxpayers from unilaterally amending their tax returns simply because they have discovered that a different method of accounting yields a lower tax liability than the method they originally chose." Id. at 1583.

In contrast, Capital One is trying to treat Late Fees consistently with the manner in which it reported other credit card fee income (Interchange Fees and Overlimit Fees) -- as OID. [App. 226]. Furthermore, this is not a change initiated by Capital One to obtain a better tax result. Congress changed the law and Capital One is trying to comply with that change.

The Government also relies upon Witte v. Commissioner, 513 F.2d 391 (D.C. Cir. 1975), Commissioner v. O. Liquidating Corp., 292 F.2d 225 (3d Cir. 1961), and Wayne Bolt and Nut Co. v. Commissioner, 93 T.C. 500 (1989). In Witte, the taxpayer sought to change his longtime and improper method of accounting for land sales. The taxpayer argued that he was only correcting an error when, six years later, he began correctly reporting the sales income. Reversing the Tax Court's decision, the court explained:

 

Under the approach of the Tax Court opinion . . . the taxpayer might well avoid taxes on the gain from the land sales by claiming that he was no longer required to report the payments received on the contracts as gain because that income was reportable in 1956-57, years now barred by the statute of limitations. The consent provision serves to prevent such distortion of income by requiring that the taxpayer either make a correcting adjustment . . . or continue to employ that method thereby assuring that the gain does not escape taxation.

There is language in decisions relied on by the Tax Court, and the taxpayer, saying that a taxpayer is entitled to correct an error. Of course he is, but he is not entitled to do so in a way that may distort income.

 

Id. at 395 (citations in original omitted).

In O. Liquidating Corp., the taxpayer had employed the same method of accounting for insurance premiums for 12 years when it made a "significant departure from its prior consistent method of accounting" without prior consent. Id. at 227. The court explained that the IRS is to withhold its consent "until the taxpayer agrees to adjustments that will prevent, inter alia, duplication of deduction items or omission of income items as a result of the change." Id. at 230.

Along the same vein, in Wayne Bolt and Nut Co., the taxpayer changed its method of accounting for inventory from a "seriously flawed" method of approximation when it adjusted its ending inventory after a physical inventory. Id. at 511. The court explained that "[i]f we accept respondent's position that petitioner changed its method of accounting, the proper mechanism for preventing duplications of expenses or omissions of income is embodied in section 481." Id. at 506.

Unlike the situations in Witte, O. Liquidating Corp., and Wayne Bolt and Nut Co., Capital One is seeking to correctly treat Late Fees as OID in the first two years of the enactment of Section 1272(a)(6)(C)(iii). In fact, since 2000 Capital One has reported Late Fees as OID, and the Government has not sought to change that treatment. [App. 229].

The cases cited by the Government also stand for the proposition that where a taxpayer changes its method without consent, the mechanism to ensure that income is not omitted from taxation is the imposition of a Section 481 adjustment. In this case, Capital One is not attempting to avoid any adjustment.

Capital One, unlike the taxpayers in the cases relied upon by the Government, filed Form 3115 giving notice that it was going to treat its credit card fee income as OID. [App. 319]. Unlike in the cases cited by the Government, Capital One is not seeking to report Late Fees as OID because in hindsight this is a more favorable accounting method; Congress has required the change. Permitting Capital One to report Late Fees as OID will not distort Capital One's income and will not permit any income to go untaxed. [App. 222].

 

5. Asserting that Late Fees should be treated as OID in the Amended Petition is in line with the Tax Court's jurisdiction.

 

The Government also argues that the Tax Court has "consistently rejected attempts made during the course of litigation retroactively to change a method of accounting," citing FPL Group, Inc. v. Commissioner, 115 T.C. 554 (2000) and Southern Pacific Transp. Co. v. Commissioner, 75 T.C. 497, 680 (1980). [G.Br. 24]. The Government, however, points to no bar to asserting the correct reporting of an item of income during litigation.

In Tax Court proceedings, it is customary for "new issues" to be raised for the first time during litigation. For example, in Wayne Bolt and Nut Co., the IRS first raised the method change issue and asserted a Section 481 adjustment in its amended answer. 93 T.C. at 506. See also Southern Pacific Transp. Co., 75 T.C. at 680 ("Petitioner's first formal notification that the change-of-accounting-method question would be raised by respondent came at the time of the trial of this issue.") Indeed, once invoked, the Tax Court's jurisdiction "extends to the entire subject matter of the correct tax for the taxable year." Naftel v. Comm'r, 85 T.C. 527, 533 (1985). See also Knapp v. Comm'r, 867 F.2d 749 (2d Cir. 1989); Russell v. United States, 592 F.2d 1069, 1071 (9th Cir. 1979); Peters v. United States, 618 F.2d 125 (Ct. Cl. 1979); Fisher v. Comm'r, 96 T.C.M. (CCH) 339 (2008).

 

6. Capital One did not adopt a method of accounting for Late Fees other than as OID, which it admittedly improperly implemented due to a lack of IRS guidance.

 

The Government argues that "taxpayers carefully avoid coming to grips with the fatal flaw in their case -- that they chose not to use the OID method to account for late-fee income when they filed their 1998 and 1999 tax returns." [G.Br. 21]. The Government takes the position that by reporting Late Fees under the current inclusion method, Capital One made a binding election that cannot be changed "retroactively" without IRS consent.

Capital One, however, never "adopted" the current-inclusion method on its 1998 and 1999 federal income tax returns since it could not adopt a patently incorrect method of accounting. In Silver Queen Motel v. Commissioner, 55 T.C. 1101 (1971), acq., 1972-2 C.B. 3 (I.R.S. 1972), the court held that when the taxpayer attempted to elect an impermissible accounting method, the taxpayer could choose between permissible methods as if there had been no change. The court explained:

 

Here, petitioner has not "regularly" computed the depreciation deduction for the motel properties under the double declining-balance method because the Commissioner has denied it that choice in the first instance, i.e., for the very first year of petitioner's existence and perforce for the first years of its attempted use of the unacceptable method. Since it has never had the opportunity to use "regularly" a method of computing depreciation for the motel properties, petitioner cannot be considered to be changing its method of accounting for depreciation and, therefore, section 446(e) does not apply.

 

Id. at 1105.

In deciding that IRS consent was not required, the court in Silver Queen distinguished situations where: (1) the taxpayer wanted to change from one permissible accounting method to another, more favorable accounting method; and (2) the taxpayer had chosen an acceptable method but for a year other than the first year in which the method could be employed. Id. at 1105. The court explained that although the IRS has broad discretion "to establish certain accounting rules . . . it is noteworthy that respondent points to no significant administrative complication which would arise were petitioner now allowed to adopt" a permissible accounting method. The court also found:

 

Furthermore, respondent has in no way intimated that petitioner attempted to delay or otherwise obstruct the operation of the revenue laws. Thus, we are not presented with a situation where lack of good faith on the taxpayer's part may cause his plea for relief to be denied.

 

Id. at 1106.

The Silver Queen court concluded that denying the taxpayer the ability to use a permissible method "imposes too strong a sanction for petitioner's concededly mistaken initial choice of an unacceptable method of computing depreciation." Id. at 1106. Accord Maid-Rite Steak Co., Inc. v. United States, 643 F. Supp. 1162, 1167 (M.D. Pa. 1986) ("Having mistakenly selected an impermissible avenue in good faith, the plaintiffs should not be precluded from selecting the permissible method"); Convergent Tech., Inc. v. Comm'r, 70 T.C.M. (CCH) 87 (1995); Southern Pacific Transp. Co v. Comm'r, 75 T.C. 497, 685 (1980) ("This is not a case where a taxpayer is attempting to change from an accounting procedure which is clearly wrong to one which is clearly right. Were that the case, we might be inclined, under some decisions of this Court, to regard the change as one not requiring the Commissioner's consent"); Rev. Rul. 72-491, 1972-2 C.B. 104.

The Government cannot point to any malfeasance or game-playing by Capital One. The court in Mamula v. Commissioner, 346 F.2d 1016 (9th Cir. 1965), found in favor of a taxpayer under similar circumstances:

 

The present case does not involve an election by a taxpayer to which he is conclusively bound. Indeed, the taxpayer could not be bound by his election for it was a non-allowable choice -- it was not allowable and not allowed. No one was bound. We are not here concerned with a taxpayer who uses hindsight to learn that the method he had chosen, though proper, was not the most advantageous to him. We are rather concerned with an instance where the method chosen by the taxpayer is advanced in good faith, and later conceded to have been improper.

 

Id. at 1018-1019.

Here, Capital One is not seeking to change from one permissible accounting method to another, more favorable accounting method. Instead, Capital One is trying to employ the only permissible method to report Late Fees. See Foley v. Comm'r, 56 T.C. 765 (1971) (refusing to permit the IRS to take advantage of the taxpayer's mistake and force taxpayer to use the least favorable method). Here, it is the dilatory inaction of the IRS to issue any guidance indicating which credit card income constituted OID that led Capital One astray to improperly report Late Fees.

 

7. Late Fees are not an "item of income" separate and distinct from OID for which Capital One needed to obtain specific and special consent

 

In its opening brief, Capital One suggested that when the U.S. Supreme Court went looking for and could not find a definition of an "item of income," it looked to Section 61. [C.Br. 26]. The Government takes issue with Capital One's attempt to define an "item of income" in absence of any statutory or regulatory authority, but offers nothing in its absence other than arguing that due to their amount Late Fees are an item of income that Capital One was required to separately identify on its Form 3115. [G.Br. 26]. The Tax Court made the same, erroneous finding. [App. 82-83]. The regulations define a "material item" as "any item that involves the proper time for the inclusion of the item in income." Reg. § 1.446-1(e)(2)(ii)(a). Indeed, the IRS amended the regulations to make clear that the focus is not on the amount of the income or deduction, but is rather on the timing of inclusion or deduction. See Prop. Reg. § 1.446-1(e)(2)(ii)(a), 33 Fed. Reg. 18936 (Dec. 19, 1968); Reg. § 1.446-1(e)(2)(ii)(a) (as amended by T.D. 7073, 1970-2 C.B. 98).

In its opening brief, Capital One cited Section 61 and several cases, including the Supreme Court's decision in Gitlitz v. Commissioner, 531 U.S. 206 (2001), because they offered at least some guidance to defining "item of income."1 The Government disagrees and argues that "courts have repeatedly held that items not specifically enumerated in § 61 were material items under Treas. Reg. § 1.446(e)(2)(ii)(a) [sic.]." [G.Br. 28]. For support, the Government cites several cases, none of which involve an "item of income." [G.Br. 28]. However, all of the cases cited by the Government involve "items" specifically addressed by particular statutes. For example, whether costs should be expensed as repairs or deducted as depreciable property is determined under Sections 162 and 167. See FPL Group, supra.; Standard Oil Co. v. Comm'r, 77 T.C. 349 (1981); Reg. § 1.446-1(e)(2)(iii), Ex. 2, 6. Similarly, the treatment of inventory is governed by Section 471. See, e.g., Diebold, supra.; Pacific Ent. v. Comm'r, 101 T.C. 1 (1993).

The Government also cites Leonhart v. Commissioner, 27 T.C.M. (CCH) 443 (1968), aff'd, 414 F.2d 749 (4th Cir. 1969), which dealt with an accounting method change for commission income, and argues that "[i]f taxpayer's argument in this case were accepted, those commissions would not be a separate item, but rather a 'component' of compensation for services." [G.Br. 29]. According to Section 61, however, commission income is a component of compensation for services: "Compensation for services, including . . . commissions."

The facts in Leonhart support Capital One's position that Late Fees are correctly considered a component of OID. In Leonhart, the taxpayer's accounting method change was not initiated by a change in the law and the taxpayer did not file Form 3115. Instead, the taxpayer simply reported his commission income employing a different method. If the taxpayer in Leonhart had filed Form 3115, describing the "item" to be changed as "compensation for services," under the Government's litigating position in this case, that description would not be sufficiently specific to contemplate commission income.

The definition of what is the "item" is critical because when a taxpayer treats some components of an item one way and some components of an item another way, that is "akin" to an error and taxpayers do not need the consent of the IRS to correct such an error. See C.Br. 30, et seq.; see also Eugene Seago, Jerome Horvitz, and Frank Linton, When Is the Correction of an Error a Change in Taxpayer's Method of Accounting?, 73 J. Tax'n 76, Aug. 1990. When if filed Form 3115, Capital One intended to report all OID income in accordance with Section 1272(a)(6)(C)(iii), but was not aware that Late Fees were OID until the IRS issued guidance.

The Government argues that because Capital One consciously failed to report Late Fees in 1998 and 1999 as OID, correcting that treatment is not "akin" to correcting that reporting error. [G.Br. 31]. The cases cited by the Government to rebut Capital One's "component" argument are distinguishable and reflect taxpayer's attempts to come within the strictures of Regulation § 1.446-1(e)(2)(ii)(b) primarily to avoid the assertion of a Section 481 adjustment. For example, in Huffman v. Commissioner, 126 T.C. 322, 323 (2006), the taxpayer's accountant made an error in employing the LIFO inventory method that resulted in understating income. The IRS corrected the taxpayer's accounting method and asserted a Section 481 adjustment. The taxpayer argued that the IRS's correction was not a method change, but instead was "merely the result of his correction of a mathematical error made by the accountant." Id. at 339. The court disagreed and held that the IRS changed the taxpayer's method and did not correct a posting or mathematical error. The court distinguished the cases cited by the taxpayer, holding them to their particular, unique facts, explaining:

 

While, in some circumstances, a taxpayer deviating from its previously established method of accounting may again adhere to its established method before the deviation has time to harden into a method of its own, the accountant's consistent error for no less than 10 years rules out that possibility.

 

Id. at 355. See also Sunoco, Inc. v. Comm'r, supra, (taxpayer attempted to change accounting method that it consistently used for 11 years without consent).

None of the cases relied upon by the Government reflect facts similar to those presented in this case. The Form 3115 filed by Capital One demonstrated its attempt to correctly report credit card fees as OID. [App. 319]. Here, it is the IRS's failure to timely issue guidance that caused Capital One's to incorrectly report Late Fees on its 1998 and 1999 tax returns.

Capital One did not consciously choose to report Late Fees under an improper method. Unlike Huffman, Capital One is not arguing that its treatment of Late Fees was an "error" to avoid the imposition of a Section 481 adjustment. See also Color Arts, Inc. v. Comm'r, T.C. Memo. 2003-95 (failure to impose a Section 481 adjustment would permit the taxpayer a double deduction).

 

8. The IRS should not be permitted to keep Capital One from reporting Late Fees properly simply because it does not like the result

 

The Government argues that the IRS did not abuse its discretion in refusing to grant its consent to Capital One to report Late Fees properly in 1998 and 1999. [G.Br. 46]. Capital One acknowledges that this case presents unique facts that do not fit neatly into existing authority. Nonetheless, the IRS abuses its discretion when it refuses to grant consent not because the relief sought is incorrect or somehow garners an unwarranted benefit to Capital One, but simply because under these unique facts the IRS does not like the results.

The facts elicited below reflect that Capital One is not seeking to treat Late Fees as OID; this is a requirement imposed by Congress. Indeed, Capital One timely filed Form 3115 with its original 1998 tax return giving the IRS notice that it was changing its accounting method for credit card fees to comply with Section 1272(a)(6)(C)(iii). [App. 319]. Beginning with its 2000 tax return, Capital One reported Late Fees for both Capital One Bank and Capital One F.S.B. correctly as OID. [App. 229]. Since 2000, Capital One has continually reported Late Fees as OID on its income tax returns. [App. 229]. The IRS has neither disputed this treatment nor sought to adjust Capital One's treatment of Late Fees as OID. [App. 229-30].

It was not until 2004 that the IRS finally informed taxpayers that Late Fees are OID. See Rev. Proc. 2004-33, 2004-22 I.R.B. 989. It is also clear that before it issued Revenue Procedure 2004-33, the IRS was aware of this issue and permitted taxpayers who guessed correctly to report Late Fees as OID. See I.R.S. Field Svc. Adv. 200145013 (Aug. 3, 2001). Under these unique facts, it is an abuse of discretion for the IRS to withhold its consent and refuse to permit Capital One to report Late Fees properly as OID for 1998 and 1999. See, e.g., Sec. Benefit, 517 F. Supp. at 773 (abuse of discretion for IRS to refuse a request for change from improper to proper method); SoRelle v. Comm'r, 22 T.C. at 469 (IRS could not compel a taxpayer to remain on improper accounting method); I.R.S. Field Svc. Adv. 200102004 (Aug. 14, 2000) ("Where the request for change is from an improper to a proper method, the Commissioner's discretion is limited.").

B. Rewards Issue

Redeemable loyalty coupons or miles programs have become a popular way for taxpayers to promote their business and generate sales. The MilesOne Program was at the forefront of this phenomenon. In this case, Capital One is seeking to deduct its estimated accrued cost of issuing MilesOne miles under Regulation § 1.451-4. Although the amounts that Capital One seeks to deduct in the years before the Court are relatively small, because of the explosive growth and popularity of the MilesOne Program, the expense accrual has grown annually by tens of millions of dollars. [App. 314].

The Government concedes that Capital One issued MilesOne miles or "coupons" as contemplated in Regulation § 1.451-4 when it lent money to cardholders. [App. 215]. The Government also agrees that Capital One reasonably estimated the anticipated expenses associated with redeeming those coupons. [App. 218, 672]. The Government and Capital One, however, disagree whether: (1) Capital One issued miles "with sales;" and (2) Capital One had gross receipts to "match" with the expense associated with issuing miles.

 

1. There is no rational basis to treat lending money differently from providing services for purposes of Regulation § 1.451-4.

 

The Government echoes the Tax Court finding that Capital One did not issue miles or coupons to its cardholders with a "sale" when it lent money. [G.Br. 50]. The Government clings to the Tax Court's finding that Regulation § 1.451-4 "encompasses a sale of services, but it does not follow that every provision of services is a sale of services." [G.Br. 51; App. 198]. (Emphasis in original). The Government reasons that although Regulation § 1.451-4 is sufficiently broad to contemplate the "sale of services," in a credit card transaction the "cardholder does not buy lending services." [G.Br. 50].

Like the Tax Court, the Government cites no authority for its unprecedented position. In formulating its finding that lending money is not a "sale of services" the Tax Court looked to the Uniform Commercial Code ("U.C.C.") and snippets lifted from cases that have no relevance to the regulation under review.2 [App. 198]. Similarly, the Government defines a "sale" by the labels ascribed to the participants of a sale. [G.Br. 50]. For example, the Government argues that whether or not Regulation § 1.451-4 applies to Capital One and the MilesOne Program depends upon whether you can refer to the cardholder as a "buyer" and to Capital One as a "seller." [G.Br. 50]. This is not a meaningful or sound basis upon which to deny Capital One the ability to deduct its estimated accrued cost of issuing MilesOne miles.

As the IRS itself admitted, the meaning of the term "with sales" in Regulation § 1.451-4 is "unclear." See I.R.S. Gen. Couns. Mem. 37221 (Aug. 18, 1977); I.R.M. 4.43.1.12.6.5 (Jul. 23, 2009) ("the proper tax treatment of points awarded customers is uncertain"). The IRS interpretation of this term has only centered upon the relationship between the "sale" and the issuance of the coupon.

Throughout the years, the IRS has reasoned that, since the purpose of the regulation is to "match, in the same year, sales revenues with the expenses incurred in producing those revenues," the coupon must be issued incident to that revenue generating activity. Rev. Rul. 78-212, 1978-1 C.B. 139. See I.R.S. Gen. Couns. Mem. 37221, supra, ("'with sales' means that the coupons must be issued as part of the sale and not as compensation, or for a separate consideration apart from the sale"); see also Mooney Aircraft, Inc. v. United States, 420 F.2d 400, 411 (5th Cir. 1969). For example, the IRS has determined that coupons distributed gratuitously to potential customers does not meet the "with sales" requirement. See Rev. Rul. 73-415, 1973-2 C.B. 154; Rev. Rul. 78-212, supra. Redeemable coupons issued to former customers who referred sales prospects are not issued "with sales." See Rev. Rul. 78-97, 1978-1 C.B. 139. Likewise, coupons issued only to winning gamblers and coupons issued as prizes are also not issued "with sales." See Rev. Rul. 74-69, 1974-1 C.B. 113; I.R.S. Gen. Couns. Mem. 35524, supra.

Prior to this case, the IRS has never defined the "with sales" requirement in relation to the labels ascribed to the participants of the transaction that generates the revenue for which the coupon is issued. The Government formalistically explains that "[a] sale requires a buyer and a seller," and argues that Capital One is attempting to "shoehorn the MilesOne program into the scope of the coupons-with-sales regulation by arguing that lending is a 'sale' of lending services." [G.Br. 50-51]. The Government misses the point.

The IRS has interpreted Regulation § 1.451-4 to apply to situations in which redeemable coupons are issued by businesses that provide services. A sale of goods is not required to invoke the regulation. Indeed, "Respondent concedes that 'sales' as used in section 1.451-4 Income Tax Regs., is broad enough to include the sale of services as well as the sale of goods." [App. 197]. See I.R.S. Gen. Couns. Mem. 35524, supra. (Reg. 1.451-4 "can be applied to service establishments that do not sell goods or other property"); Rev. Rul. 74-69, supra. But the Tax Court and the IRS, without any authority or sound reasoning, take the position that "[t]he fact that lending may be a service does not transform lending into a sale." [G.Br. 51; App. 198].

According to its guidance, the IRS agrees that if a casino issues a redeemable coupon each time a patron placed a bet, the casino would be entitled to deduct its estimated cost of the coupons issued under Regulation § 1.451-4. See Rev. Rul. 74-69, supra.; I.R.S. Gen. Couns. Mem. 35524, supra. In this case, Capital One stands in very similar footing to the casino. Capital One is providing a service, lending money, to its cardholder in exchange for various forms of compensation (as explained below). Simply because Capital One and its cardholder are not typically associated with the labels "seller" and "buyer" is not a legally defensible position upon which to deny it the ability to use Regulation § 1.451-4 to clearly reflect its income from the service of lending money. Indeed, if labels were conclusive to the determination of this issue it should be highlighted that in 1998 and 1999 Capital One reported "Gross Receipts or Sales" of $2,327,837,063 and $3,784,754,665, respectively, on Line 1a of its federal income tax returns. [App. 603-04].

a. The Government's litigating position in this case should not be accorded any deference.
In cases involving questions of regulatory interpretation, the starting point is the language itself. See Black & Decker Corp. v. Comm'r, 986 F.2d 60, 65 (4th Cir. 1993) ("Regulations, like statutes, are interpreted according to canons of construction"); Hinkleman v. Shell Oil Co., 962 F.2d 372, 377 (4th Cir. 1992), quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (1975). In this litigation the Government takes the position that the "plain language of the regulation" implicates that "[t]he coupons-with-sales regulation applies to taxpayers that issue coupons 'with sales' -- not 'with their business operations." [G.Br. 53-54]. However, the IRS has previously acknowledged that the term "with sales" is unclear. See I.R.S. Gen. Couns. Mem. 37221, supra.; I.R.M. 4.43.1.12.6.5, supra. Nonetheless, the Government believes that its interpretation of the "with sales" requirement should be given deference. [G.Br. 55].

While it is generally true that an agency's interpretation of its own regulation should be afforded deference, the weight accorded to that interpretation depends upon the thoroughness of that agency's consideration, the validity of its reasoning, consistency with earlier and later pronouncements, and other factors that give an interpretation the power to persuade. See United States v. Mead Corp., 533 U.S. 218, 228 (2001), citing Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944). With respect to the "with sales" requirement, the IRS has never limited this term by reference to the type of business engaged in by the issuer of the coupon. On the few occasions that the IRS has interpreted "with sales," it has extended its meaning to include businesses other than merely sellers of goods.3 As previously mentioned, the IRS has interpreted this term to apply to service providers. See, e.g., I.R.S. Gen. Couns. Mem. 35524, supra. As the IRS explained:

 

Thus, the term "with sales" in section 1.451-4 means that the coupon must be issued to a purchaser as part of a sale, that is, the issuance of the coupon must be conditioned on and solely in consideration for the purchase of goods and/or services.

 

I.R.S. Gen. Couns. Mem. 37221, supra.

The Government acknowledges that "[t]he Commissioner has never interpreted the 'with sales' requirement to apply to the lending transactions of banks that offer rewards programs to cardholders." [G.Br. 47]. This is precisely the point. Here, the Government's "interpretation" that the "with sales" requirement does not apply to lending transactions is nothing more than its litigating position that should be afforded no deference. See Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 213 (1988) ("Deference to what appears to be nothing more than an agency's convenient litigating position would be entirely inappropriate."); Inv. Co. Inst. v. Camp, 401 U.S. 617, 628 (1971) ("It is the administrative official and not appellate counsel who possesses the expertise that can enlighten and rationalize the search for the meaning and intent of Congress"); Gose v. United States, 451 F.3d 831, 838 (Fed. Cir. 2006) ("[T]he interpretation either has to be that of the Secretary or properly imputed to him in some way"); see also Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168-69 (1962) ("The courts may not accept appellate counsel's post hoc rationalizations for agency action.")

 

2. Application of Regulation § 1.451-4 more clearly reflects Capital One's annual income generated from the MilesOne Program.

 

The Government argues that Capital One did not have gross receipts to "match" with the miles it issued. [G.Br. 58]. Without support the Government takes the position that to apply Regulation § 1.451-4, a taxpayer must trace the coupon expense to the "sale" made. Here, the Tax Court and the Government point out that at the time Capital One lends money to its cardholder it does not know precisely the amount of revenue generated from that loan. [App. 199; G.Br. 59].

This perception of how Regulation § 1.451-4 is to operate is not grounded in the language of the regulation or any authority. Instead, the regulation explains only that "in computing the income from such sales, subtract . . . from gross receipts with respect to sales with which trading stamps or coupons are issued" the cost of redeeming the coupons and the accrual for future redemptions. By its terms, the regulation does not require taxpayers to match the revenue from the sale of a specific good or service with the expense associated with the coupon issued at that precise moment. Indeed, requiring such "pairing" of income and expense is inadministerable. Instead, our tax system contemplates that taxpayers will calculate their taxable income on an annual basis. See Hayutin v. Comm'r, 508 F.2d 462, 474-75 (10th Cir. 1974) ("The federal income tax law is based upon an annual accounting period concept."). The IRS agrees with this formulation stating that "the purpose of section 1.451-4 is to match, in the same taxable year, revenues with the expenses incurred in producing those revenues." Rev. Rul. 78-212, supra (emphasis added).

a. There are at least three sources of income against which Capital One "matches" the expense associated with issuing MilesOne miles.
The Government argues that there is no "match" between the revenue generated from a credit card loan and the expense of issuing miles. [G.Br. 60]. The Government argues that although the cost of issuing the miles is incurred currently, the revenue generated from the lending transaction is earned in future years, creating an inherent "mismatch." [G.Br. 61]. The Government misunderstands Capital One's business and the revenue generated therefrom.

Capital One earns income the moment the cardholder acquires his MilesOne credit card. First, Capital One charged MilesOne cardholders an upfront Annual Membership Fee. [App. 414-16, 449]. Second, with respect to "revolving" cardholders, Capital One begins to immediately accrue finance charges for credit card purchases. [App. 411]. Capital One also earns Interchange Fees each time a MilesOne cardholder uses his credit card. [App. 98-202, 414-16]. As a result, Capital One has at least three sources of income against which to "match" the expense of issuing MilesOne miles that are in no way "uncertain" or "future" revenues.

These revenues are in addition to revenue Capital One earns from other fees such as Overlimit Fees and Late Fees. While it is true that on an individual account basis Capital One cannot know with certainty whether these other fees will be incurred, on a pooled basis for the MilesOne Program as a whole, Capital One does know that it will receive significant revenue from these other sources during the course of the year.

Contrary to the Government's position, requiring Capital One to wait to deduct its expected future expense for airline tickets purchased in redemption of MilesOne miles does not accurately reflect Capital One's economic situation with respect to the MilesOne Program. For example, in 1998 Capital One generated $548,253 in taxable income from the MilesOne Program, while its actual cost of redeeming cardholder's miles was only $1,578. [App. 313-14]. However, Capital One's expected future expense for miles issued to cardholders but not redeemed, which the IRS disallowed for tax purposes, was $583,411. [App. 314], This discrepancy grows wider as the MilesOne program became wildly popular. By 2001, the taxable income generated by the MilesOne Program increased to $450,881,888. [App. 314]. Capital One's anticipated future redemption expense for outstanding miles increased by $163,238,333 in 2001, over three times as much as its actual cash redemption expense of $49,849,380 during 2001. [App. 314]. It is clear that without deducting the expense accrual for issuing MilesOne miles, Capital One's income will be substantially overstated, the disparity of which grew wider as more cardholders borrowed money and accrued miles. [App. 314].

 

CONCLUSION

 

 

For the foregoing reasons and those stated in Capital One's opening brief, the decision of the Tax Court should be reversed and the case should be remanded to the Tax Court with instructions to enter judgment in favor of Capital One in the amounts of $97,764,186 for 1998 and $7,644,475 for 1999, plus, for each year, statutory interest as allowable by law.

DATED: January 28, 2011

Respectfully submitted,

 

 

Jean A. Pawlow

 

Elizabeth Erickson

 

Kevin Spencer

 

McDermott Will & Emery LLP

 

600 Thirteenth Street, N.W.

 

Washington, DC 20005-3096

 

Telephone: 202-756-8000

 

Fax: 202-756-8087

 

Attorneys for Petitioner-Appellant

 

Capital One Financial Corporation

 

FOOTNOTES

 

 

1 Apparently the government relies on the description of "item" in a tax publication as its sole authority for that term's definition. [G.Br. 25].

2 In I.R.S. General Counsel Memorandum 35524 (Oct. 19, 1973), the IRS found that the U.C.C. definition of sale was too restrictive.

3 In fact, the IRS amended the regulation to make it applicable to sellers of trading stamps and premium coupons. See I.R.S. Gen. Couns. Mem. 33837 (May 31, 1968).

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    CAPITAL ONE FINANCIAL CORPORATION AND SUBSIDIARIES, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
  • Court
    United States Court of Appeals for the Fourth Circuit
  • Docket
    No. 10-1788
  • Authors
    Pawlow, Jean A.
    Erickson, Elizabeth
    Spencer, Kevin
  • Institutional Authors
    McDermott Will & Emery LLP
  • Cross-Reference
    For the Tax Court decision in Capital One Financial Corp. v.

    Commissioner, 130 T.C. No. 11 (May 22, 2008), see Doc

    2008-11463 or 2008 TNT 101-13 2008 TNT 101-13: Court Opinions.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2011-10174
  • Tax Analysts Electronic Citation
    2011 TNT 92-16
Copy RID