Court Opinion

ID: 9476874
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:07:55.031146+00
Date Added: 2024-06-11T17:45:33.592186
License: Public Domain

CUDAHY, Circuit Judge,
concurring:
In view of the extraordinary deference due the Commissioner under section 446 of the Internal Revenue Code, we ought to affirm his determination that the cash method income figures produced by Shopper’s Charge do not clearly reflect income. For the most part, the majority presents an excellent analysis of a case that is by no means as simple as it appears at first blush. Essentially, this case involves the availability for tax purposes of the cash accounting method to a taxpayer which is “really” on the accrual method.
I must write separately, however, about the majority’s treatment of estimation as a basis for the result. First, I shall briefly describe how Shopper’s Charge made its estimates. In deriving cash method income, Shopper’s Charge significantly revised two sets of income accounts: merchants discount income, obtained from percentage . commissions that Shopper’s Charge withheld from the payments that it received from consumers and passed on to merchants, and finance income, obtained from interest charges on unpaid credit balances. To derive annual cash method merchant discount income from the corresponding accrual method figure, Shopper’s Charge attempted to estimate the commissions that it had included in accrual method income before it actually collected the corresponding payments from consumers. Thus, it subtracted all of the finance income accrued during December and half of November. This deduction was based on a judgment that approximately one and one-half months worth of finance income remained uncollected at year’s end. See Ap-pellee’s Br. at 4.
The Commissioner offers two objections to these calculations: (1) the estimates were used to circumvent the principle of annual accounting, and (2) the estimates introduced unacceptable inaccuracies. The majority, relying on Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 99 S.Ct. 773, 58 L.Ed.2d 785 (1979) and American Automobile Association v. United States, 367 U.S. 687, 81 S.Ct. 1727, 6 L.Ed.2d 1109 (1961), finds support for the Commissioner’s position in the first rationale.
This analysis, however, overlooks an important difference between the estimates at issue in Thor and American Automobile Association and the estimates used by Shopper’s Charge. In Thor, a power tool manufacturer sought to reduce current income by reducing the book value of its aging inventory of spare parts. Thor reduced the book value of its parts inventory based on estimates of the proportion of its existing inventory that would ultimately prove unsalable. In American Automobile Association, a road club sought to offset current receipts of membership dues by the estimated costs of providing servic*442es in later tax periods. For both of these taxpayers, the use of estimates was intended to hasten the recognition of future costs or losses that, during the tax year at issue, were still contingent on future events.
The estimates used by Shopper’s Charge, in contrast, do not involve projections about future events. They were merely an inexpensive way to obtain imprecise cash accounting figures from a bookkeeping system designed around accrual accounting principles. Shopper’s Charge could, at greater administrative expense, have produced more exact cash method figures. It could, for example, have determined its actual receipts of finance income at year’s end rather than simply adjusting for a one and one-half month backlog of receivables. The estimates used by Shopper’s Charge may have detracted from the precision of the cash method income figures, but they did not, in my view, violate the principle of annual accounting that the Court sought to defend in Thor and American Automobile Association. Cf. Kaiser Steel Corp. v. United States, 717 F.2d 1304, 1307 (9th Cir.1983) (distinguishing uncertainty about the “very fact” of liability, which precludes taxpayer from relying on estimates, from uncertainty about the amount of liability, which need not).
There may, however, be some potential merit in the Commissioner’s attack on the imprecision inherent in the estimates on which Shopper’s Charge relied. Taxpayers are required to keep adequate records to support their declarations of taxable income, and have no grounds for protest if the Commissioner imposes a workable accounting method when confronted with inadequate records. See In re Newman, 94 F.2d 108, 111 (6th Cir.1938); Gajewski v. Commissioner, 67 T.C. 181, 196 (1976); see also 26 C.F.R. § 1.6001-l(a) (1986) (“any person subject to tax ... shall keep such permanent books of account or records ... as are sufficient to establish the amount of gross income ... required to be shown by such person in any return”). The Commissioner contends that Shopper’s Charge could have produced more accurate cash method figures, but failed to do so, and that this failure supports the conclusion that the cash method did not clearly reflect income.
Shopper’s Charge responds that the affidavits of its accounting experts, which the government has accepted for the purposes of the summary judgment motion (Defendant’s Memorandum in Support of its Motion for Summary Judgment at 13-14, Nos. 80-262C, 81-817C), establish that its method was consistent with standard accounting practice. We must accept the experts’ representations that Shopper’s Charge complied with “appropriate and accepted accounting practices” (e.g., Plaintiff’s Motion for Summary Judgment, Exhibit A-3, Affidavit of Lowell R. Allen at 5). The experts’ affidavits, however, approve of the estimation techniques “under all the circumstances” 1 — including the primary reliance of Shopper’s Charge on an accrual accounting system. This leaves open the possibility that “accepted accounting practices” would have dictated a higher level of precision if Shopper’s Charge had relied exclusively on cash accounting and had organized its entire accounting system on this basis. If, in fact, the method used here comported with accepted practices only for taxpayers seeking to derive cash method figures from accrual method accounts, the experts’ representations are not persuasive. The record, however, does not tell us how the cash method figures upon which Shopper’s Charge relies might differ from the figures that would be produced by a similarly situated firm that organized its accounting system around cash method principles. Because of this deficiency, we ought not to rely on the estimation issue to support the Commissioner's decision.
There are, however, adequate other grounds to affirm the result. Shopper’s Charge, alone among the subsidiaries of *443American Fletcher, disregarded generally accepted accounting principles for purposes of computing its taxable income and put together (based on accrual method figures) a set of cash method books. These alternative accounts, because of the large accounts receivable balances that credit card companies carry at year’s end, substantially reduced taxable income for the two years in question. The majority’s analysis of these factors (and the existence of additional factors cited by the Commissioner) persuade me that the Commissioner did not abuse his broad discretion.

. Accountants who provided affidavits for Shopper's Charge hedged their endorsement of the cash method accounts with phrases including "under the circumstances of SCS operations” (Plaintiffs Motion for Summary Judgment, Exhibit A-2, Claytor Affidavit at 4, Nos. IP 80-262-C, IP 81-817-C), "under the circumstances” (id., Exhibit A-3, Allen Affidavit at 5), and "under the circumstances of its business" (id., Exhibit A-4, Robertson Affidavit at 4).