Opinion ID: 3037736
Heading Depth: 2
Heading Rank: 2

Heading: Is A Discount in the Form of A Cash Advance Income

Text: When Received? [2] There appears to be no circuit court authority on point, but the Supreme Court authorities bracketing the question compel our answer: Cash advances in exchange for volume purchase commitments, subject to pro rata repayment if the volume commitments are not met, are not income when received. 8 Milenbach v. CIR, 318 F.3d 924, 930 (9th Cir. 2003). 6896 WESTPAC PACIFIC FOOD v. CIR [3] The statutory definition of gross income is expansive.9 Commissioner v. Glenshaw Glass Co. held that punitive damages received by a successful litigant were “income” because they were “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”10 The government argues that the cash advances in this case fit that definition because Westpac had “complete dominion” over the money. It did not have to put the cash in a trust account and could spend the money as it chose. But that leaves out sine qua non of income: that it be an “accession to wealth.” One may have “complete dominion” over money but it does not become income until it is an “accession to wealth.” That is why borrowed money is not income, even though the borrower has “complete dominion” over the cash.11 “Because of this [repayment] obligation, the loan proceeds do not qualify as income to the taxpayer.”12 The Supreme Court decisions bracketing this case are CIR v. Indianapolis Power & Light Co.13 on one side, and Automobile Club of Michigan v. CIR14 and Schlude v. CIR15 on the other. [4] Indianapolis Power held that utility customers’s security deposits are not income to the utility because of the obligation to repay the money when service ended.16 The decision 9 26 U.S.C.A. § 61(a). 10 See Glenshaw Glass, 348 U.S. at 431. 11 See CIR v. Indianapolis Power & Light Co., 493 U.S. 203, 207 (1990) (Explaining that “it is well settled that receipt of a loan is not income to the borrower.”). 12 CIR v. Tufts, 461 U.S. 300, 307 (1983). 13 CIR v. Indianapolis Power & Light Co., 493 U.S. 203 (1990). 14 Automobile Club of Michigan v. CIR, 353 U.S. 180 (1957). 15 Schlude v. CIR, 372 U.S. 128 (1963). 16 Indianapolis Power, 439 U.S. at 211-12. WESTPAC PACIFIC FOOD v. CIR 6897 analogizes the security deposits to loans because of the repayment obligation.17 [5] Automobile Club of Michigan holds that prepaid membership dues are income when received, despite the association’s obligation to provide membership services — maps, tire repair and the like — during the subsequent year.18 The reason was that pro rata application of the dues to each month “bears no relation to the services” the club had to perform.19 Drivers do not call AAA once a month to repair a flat or send a map, and AAA is entitled to keep the membership dues regardless of whether the member ever requests any goods or services. Schlude held that cash paid to a dance studio for ballroom dancing lessons was income when received, not when the lessons were provided.20 The Court applied Automobile Club of Michigan, because the money was not refundable and the studio could keep it even if the student did not show up for dance lessons.21 [6] This case is like Indianapolis Power, not Automobile Club of Michigan or Schlude. The cash advance trade discounts are like the security deposits in that they are subject to repayment, and unlike the membership dues in that the recipient cannot keep the money regardless of what happens after receipt. Westpac could only retain the full, up front trade discount if it met the volume requirements. Like the security deposit, the cash advance is subject to repayment. The only difference is that the repayment amount in this case may not be the full amount advanced by the vendor, but that is because the repayment amount is reduced pro rata to the extent Westpac fails to fulfill its volume commitment. 17 See id. at 208. 18 Automobile Club of Michigan, 353 U.S. at 712-13. 19 Id. at 712. 20 Schlude, 372 U.S. at 137. 21 See id. at 130. 6898 WESTPAC PACIFIC FOOD v. CIR [7] Because the taxpayer here has to pay the money back if the volume commitments are not met, it is not an “accession to wealth” as required by Glenshaw Glass. Westpac either has to buy a specified volume of goods for more than it would otherwise pay or pay back the money, just like Harry Homeowner. Thus the cash advance discounts are, like a loan or customer security deposit, liabilities rather than income when received. The Tax Court found that Westpac’s accounting for the cash advances as affecting cost of goods sold complied with generally accepted accounting principles, but correctly held that accounting rules are not necessarily controlling for tax purposes.22 The regulations require that inventory accounting conform to best accounting practices and clearly reflect income.23 But that does not go far enough to transform the cash into “income” in the face of Indianapolis Power. We cannot agree with the government that Westpac’s “unfettered use” of the money makes it income, because it was not an accession to wealth. Rather, it was merely an advance against an obligation, repayable if the obligation was not performed. [8] Our decision in Milenbach24 is more analogous to this case than Schlude or Automobile Club of Michigan. In Milen22 See American Automobile Ass’n v. United States, 367 U.S. 687, 693 (1961) (“[t]o say that in performing the function of business accounting the method employed by the Association ‘is in accord with generally accepted commercial accounting principles and practices’ . . . is not to hold that for income tax purposes it so clearly reflects income as to be binding on the Treasury.”). 23 See 26 C.F.R. § 1.471-2(a): (a) Section 471 provides two tests to which each inventory must conform: (1) It must conform as nearly as may be to the best accounting practice in the trade or business, and (2) It must clearly reflect the income. 24 Milenbach v. CIR, 318 F.3d 924 (9th Cir. 2003). WESTPAC PACIFIC FOOD v. CIR 6899 bach, a Los Angeles entity loaned the Oakland Raiders $6.7 million, repayable only out of revenue from the luxury suites to be built in the future, to induce the team to move to Los Angeles.25 Even though it was a non-recourse loan with no certain repayment date, and even though the Raiders neither built the suites nor made any payments, we held that the $6.7 million was not income because the repayment obligation was genuine.26 The case at bar is easier than Milenbach because the cash advances here are more plainly subject to repayment in calculable amounts by a set date. Westpac not only had a duty to repay the discounts, it actually did repay them when it did not meet the volume commitments. When Westpac did buy the required volume of goods, it paid list price rather than a discounted price, and realized the income for tax purposes. [9] It works out about the same as with Harry Homeowner: He has to sell the chairs for more than he paid in order to make money on them. Westpac had to sell the lightbulbs, ribbons, greeting cards, and such for more than they paid in order to make money on them. It remains exceedingly difficult to make money merely by buying things. Westpac did not get any richer when it received its volume discount in the form of cash up front than Harry Homeowner did when he got the $400 from the furniture store. There was no accession to wealth when Westpac got the cash, just an increase in cash assets offset by an equal liability for the advance trade discounts. REVERSED. 25 See id. at 929. 26 See id. at 931.