Court Opinion

ID: 4330418
Source: CourtListenerOpinion
Date Created: 2018-11-13 23:38:19.822711+00
Date Added: 2024-06-11T14:19:45.307173
License: Public Domain

106 T.C. No. 4

                     UNITED STATES TAX COURT

 BARNETT BANKS OF FLORIDA, INC. AND SUBSIDIARIES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 16295-93.                    Filed February 29, 1996.

     P, an accrual basis taxpayer, is in the banking business and
issues credit cards. P charges its cardholders an annual
membership fee that entitles the cardholder to, inter alia, use
of the card with participating merchants, free replacement of
lost or stolen cards, 24-hour access to P's customer service
staff, and withholding of payment of disputed charges. P has the
right to cancel the credit card at any time, but, if the card is
cancelled, the annual fee is refunded ratably for the number of
months remaining in the 1-year period.
     1. Held, the annual membership fees constitute payments for
services rendered or made available to cardholders rather than
payments in the nature of additional interest or loan commitment
fees.
     2. Held, further, under Rev. Proc. 71-21, 1971-2 C.B. 549,
P may report the annual membership fees in income ratably over
the 12-month period after receipt.
                                  - 2 -

     Philip C. Cook, Terence J. Greene, Timothy J. Peaden, and

Ben E. Muraskin, for petitioner.

     James F. Kearney and Joyce C. Albro, for respondent.

     PARKER, Judge:   Respondent determined deficiencies in

petitioner's Federal income tax as follows:

               Tax Year Ended              Deficiency

              December   31,   1972           $1,299
              December   31,   1976          112,652
              December   31,   1978          379,041
              December   31,   1980        1,694,423
              December   31,   1981          961,212

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years before

the Court, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     The issues for decision are:     (1) Whether annual credit card

fees received by petitioner in the taxable years 1980 and 1981

constitute payments for services rendered or made available to

its cardholders or payments for extension of credit in the nature

of additional interest or loan commitment fees; and (2) if the

annual fees represent payments for services, whether petitioner

is entitled under Rev. Proc. 71-21, 1971-2 C.B. 549, to defer

income from the annual fees received in one taxable year for

services to be performed by the end of the next taxable year; or,

stated another way, whether respondent, in denying petitioner the

benefits of Rev. Proc. 71-21, abused her discretion in
                               - 3 -

determining that petitioner's method of accounting for prepaid

annual credit card fees does not clearly reflect income.1

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The Stipulation of Facts and the exhibits attached thereto are

incorporated herein by this reference.

     Throughout its 1980 taxable year and to the present, Barnett

Banks of Florida, Inc., has been the parent corporation of

various subsidiary bank corporations and nonbank corporations in

Florida.   References to petitioner will be to Barnett Banks of

Florida, Inc., and its subsidiaries in the collective.

Petitioner's principal place of business was in Jacksonville,

Florida, at the time it filed the petition in this case.    During

1980 and 1981, petitioner computed its taxable income under the

accrual method of accounting, on a calendar year basis.

Petitioner's Credit Card Program

     Petitioner began its bank credit card program in 1968.

During 1980 and 1981, and other years not at issue, the

     1
        The parties agree that petitioner's charitable deductions
for taxable years 1978 and 1981 should be computed after taking
into account all adjustments to petitioner's taxable income made
by respondent and the Court affecting those years; i.e., those
deductions will be determined in the Rule 155 computation
resulting from this opinion. Similarly, the amounts of the net
operating loss carryovers, investment tax credit, and minimum tax
for the years at issue will be computed during the Rule 155
proceedings. Petitioner does not dispute respondent's other
adjustments.
                               - 4 -

subsidiary bank corporations (issuing banks) issued Visa cards2

to customers who qualified for the cards.

     To apply for a card, a customer would complete a credit card

application at the branch office of an issuing bank.   The issuing

bank's credit department would review the application and decide

whether to issue a card to the applicant and, if so, the amount

of the credit limit for that account.   Once the card was issued,

the cardholder could use the card to charge the cost of goods and

services provided by merchants who accept payment by Visa card

(merchants).   Cardholders agreed to surrender their cards upon

demand, and petitioner could cancel their cards at any time for

almost any reason.

     Cardholders received new cards annually.   If a card was lost

or stolen, petitioner would replace it at no additional charge.

If the card was stolen, petitioner would issue a new card, and

the cardholder's liability for any charges resulting from the

theft of the old card, if any, was limited to $50.   If the

cardholder had a problem with the quality of a product or service

purchased with the card, under certain conditions, the cardholder

may have had the right not to pay the remaining amount due on

that product or service.   The cardholder could deduct disputed

     2
       During 1980 and 1981, a small number of Mastercard credit
cards were outstanding. For purposes of convenience we refer to
Visa cards or just cards; however, all references to Visa or
cards apply to both Visa and Mastercard credit cards. The
proposed adjustment relates to annual fees charged to both
Mastercard and Visa cardholders.
                                - 5 -

amounts from the balance, pending resolution of the dispute, when

calculating the minimum monthly payment due to petitioner.

     A convenience user is a cardholder who uses the card to

purchase goods and services, but pays off the entire balance each

month, thereby avoiding any finance charges (interest).     During

1980 and 1981, approximately 35 percent of petitioner's

cardholders were convenience users.     During the taxable years

1980 and 1981, the issuing banks charged those cardholders who

did not pay off their entire balance each month interest at the

annual rate of 18 percent on their outstanding (revolving)

balances.    This was the maximum rate allowed under Florida law.

     Each merchant would submit its Visa sales receipts (sales

drafts) either to the issuing subsidiary bank or to another bank

with which the merchant had a Visa merchant account relationship

(merchant bank); the merchant received payment from the bank in

the amount of the sales drafts less the applicable merchant

discount.3   The merchant discount was equal to a set percentage

of the total charges.   Petitioner determined the merchant's

discount percentage based on the merchant's projected annual

sales and the estimated costs of the merchant's participation in

the Visa program.   If the merchant bank was not the cardholder's

issuing bank, the merchant bank would sell the sales draft to the

     3
        The sales receipts or sales drafts were treated like
deposits of cash into the merchant's bank account, less of course
the merchant discount.
                                 - 6 -

issuing bank through the Visa interchange; the amount paid by the

issuing bank to the merchant bank was the amount of the sales

draft less an interchange fee.    The issuing bank charged the

cardholder the full amount of the sales draft.

     In 1980 and 1981, Barnett Credit Services, Inc. (BCS), a

nonbank subsidiary of Barnett Banks of Florida, Inc., performed

various services for the subsidiary banks, and hence for the

cardholders and merchants, with respect to Visa cards:    card

issuance, credit authorization, accounting, data processing,

billing services, investigation of problem charges resulting from

lost or stolen cards, and planning and marketing support

functions.   None of these functions was performed by the

subsidiary banks themselves.4    BCS offered customer assistance 24

hours a day.   BCS was a nonprofit center with respect to the

subsidiary banks, passing on the costs incurred.    The subsidiary

banks paid BCS on a monthly basis according to a fixed schedule

     4
       BCS, in turn, contracted with National Data Corporation
(NDC) to provide the credit authorization services to the banks'
merchant clients. BCS charged the banks for this service at
NDC's rates.
                                - 7 -

based on the type and number of functions provided.5    BCS also

provided many of these services to banks other than petitioner's

     5
        BCS charges the following fees to the banks (charges are
per item (transaction) unless otherwise noted):

                                        Charge to
                                        Subsidiary   Charge to
     Function                           Banks        Other Banks

     Fixed (per month)                     ---       $1,000.00

     Data entry
       Merchant deposit, paper     $0.045            $0.050
       Merchant deposit, electronic .020               .025
       Interbank in                  .020              .025
       Interchange in                .020              .025
       Payments                      .035              .040

     Cardholder
       Accounts on file (per account).150              .150
       Accounts billed (per account) .170              .200

     Plastic preparation
       Conventional/mag strip             .250         .250
       Photo                              .400         .400

     Merchant
       Accounts on file (per account).150              .150
       Accounts billed (per account) .050              .050

     Marketing (per account)         .025               n/a1
     Systems Support (per account)   .071               n/a
     Customer Service (per account) .085                n/a
     Bank accounting (per account)   .020               n/a
     Merchant deposit processing
          (per transmittal)          .050               n/a
     Fraud/security (per report)   23.500               n/a

     Optional services
       Merchant plate preparation        .300          .300
       Merchant plastic preparation      .400          .400
       Late notices                      .060           n/a
       First use notices                 .060           n/a
     1
         Services marked "n/a" were not offered to the other banks.
                               - 8 -

subsidiaries, but charged higher fees to the other banks.   See

supra note 5.   BCS did not track costs by individual cardholder.

     Beginning on October 1, 1980, petitioner started to charge

each cardholder an annual membership fee (sometimes referred to

simply as annual fee) of $15, irrespective of the cardholder's

credit line, usage, or account balance, if any, carried over from

month to month.   At that time, petitioner's major competitors

were charging between $15 and $18 for such annual fees.

Normally, a customer could not become, or remain, a cardholder

after October 1, 1980, without payment of the annual fee,

although bank managers had discretionary authority to waive the

annual fee for certain customers.   Those cardholders who chose to

discontinue use of their cards on or before October 1, 1980, were

not charged the annual fee and could pay off their existing

balances in accordance with their previous agreements; no

replacement cards were issued to such discontinuing cardholders.

     For the years involved in this case and for some further

period of time after the fee was instituted, the annual fee was

refundable to the cardholder if the card was cancelled for any

reason.6   The refund was a prorated amount of the annual fee,

based on the number of months remaining in the 12-month period

for which the annual fee was charged.

     Also beginning in October of 1980, some new services for

     6
         By April of 1983 the annual fee became nonrefundable.
                               - 9 -

cardholders were added, which petitioner offered through the use

of third-party providers.   Petitioner provided loss-protection

service whereby cardholders who lost their wallets or purses

could notify the designated third-party provider, with whom they

had listed all of their credit card accounts, and this company

would contact all the card issuers.    Petitioner made available

life insurance in conjunction with the use of the card to

purchase an airline ticket.   Similarly, rental car insurance was

provided when the cardholder charged the rental to the card.

     The amount of the annual fee to be charged was limited by

competitive factors in the industry.    The annual fee did not

cover the entire cost of serving the cardholders.    During 1980

and 1981, petitioner's revenue with respect to the credit card

program derived from four sources:     (1) Merchant discounts, (2)

interchange fees, (3) interest charges paid by cardholders with

outstanding (revolving) balances, and (4) the annual fees paid by

cardholders.   In 1979, the year prior to the institution of the

annual fee, 66 percent of petitioner's Visa revenue came from

interest charges, 33 percent from merchant discounts and

interchange fees, and the remaining 1 percent from other sources.

The issuing banks have never placed any restrictions on their use

of the annual fees for any corporate purpose.

Usual Banking Practices

     Under ordinary commercial banking practices, borrowers of

money are charged interest based on the amount of money borrowed.
                                - 10 -

Loan commitment fees are charged for the privilege of having a

fixed sum of money available to be borrowed for a given period of

time.    The amount of a loan commitment fee is almost always based

on the amount of credit made available.

     The banking industry normally and customarily treats annual

credit card fees as service income, not as interest or loan

commitment fees.   If annual fees were considered as interest and

were then combined with finance charges on outstanding

(revolving) balances, the total interest would have exceeded the

maximum rate allowed under the usury laws of many States,

including the State of Florida.    There is no correlation between

the amount of the annual fee and the amount of the cardholder's

credit line or outstanding balance.      Nor is there any commitment

on the part of the issuing banks to make use of the card

available for a given period of time, since the issuing banks may

cancel the cards at any time.

     For bank regulatory accounting purposes, banks are required

to amortize the annual fees over the period to which the fees

relate. These fees were excluded from the definition of finance

charges under the Truth in Lending Regulations, 12 C.F.R. secs.

226.4 and 226.407, as in effect for 1980 and 1981.7

Petitioner's Accounting Method

     For 1980 and 1981, petitioner's issuing banks recorded the

     7
       12 C.F.R. sec. 226.407 (1980) (special ed.) and 12 C.F.R.
sec. 226.407 (1981) [special ed.].
                                - 11 -

annual fees in their books ratably over 12 months.     When the

annual fee was assessed, the issuing banks established a credit

card receivable and made an offsetting credit entry to the

deferred income account corresponding to the calendar month of

the assessment.     They then recognized the annual fees as income

ratably over the ensuing 12-month period.8

         For financial accounting purposes and bank regulatory

accounting purposes, for the year 1980 and all years thereafter,

petitioner ratably allocated its annual fees over 12 months.      For

Federal income tax purposes, for the taxable years 1980 through

1985, petitioner ratably allocated the annual fees over 12

months.     Petitioner has maintained adequate books and records of

the annual fees so that the amount deferred on its Federal income

tax return for each of the taxable years 1980 and 1981 can be

verified from such books and records.

     Respondent determined that the annual fees assessed in

taxable years 1980 and 1981 should be included in income in the

year of receipt for Federal income tax purposes, and increased

petitioner's income by $2,962,829 and $1,010,872, for 1980 and

1981, respectively.     In addition, respondent adjusted

petitioner's income for the taxable years 1976 through 1982 in

accordance with a Schedule of Agreed Adjustments executed by

petitioner on April 12, 1993.     Respondent allowed petitioner a

     8
        In Stipulation 16 the parties have set out the details of
this accounting system.
                                - 12 -

net operating loss carryback from 1982 to 1980, adjusted the

investment credit recapture for 1981, and recomputed the

investment and other tax credits as well as the minimum tax for

several of the taxable years from 1970 through 1982.

Respondent's adjustments resulted in deficiencies in Federal

income tax in the amounts of $1,299, $112,652, $379,041,

$1,694,423, and $961,212 for the taxable years 1972, 1976, 1978,

1980, and 1981, respectively.    Respondent mailed the notice of

deficiency to petitioner on April 29, 1993, and petitioner timely

filed its petition in this Court.

                                OPINION

       Petitioner argues that the annual credit card fee is a

payment for services, and as such is eligible for partial

deferral from the inclusion in income under Rev. Proc. 71-21,

1971-2 C.B. 549.   Respondent's position is that the fee is not

payment for services, but rather, is a payment "for membership in

the card plan", which respondent then equates to an extension of

credit in the nature of additional interest or a loan commitment

fee.   In the alternative, respondent argues that if the fee is

for services, then petitioner's deferral does not clearly reflect

income, and respondent's denial of the benefits of Rev. Proc. 71-

21 was not an abuse of discretion.       Respondent argues that in

either view, Rev. Proc. 71-21 is not available to petitioner, and

the fees must be included in income in the year of receipt.
                               - 13 -

Credit Card Fees as Payment for Services

     Petitioner's credit card program provides benefits for both

merchants and cardholders.    Processing of the sales drafts

involved merchant aspects and cardholder aspects.    Transactions

could be for either convenience users or cardholders with

revolving balances.    The merchants, the convenience users, and

the revolving-balance users all were served by the operation of

this integrated system.    It is difficult to apportion the

benefits of the plan to its specific users.

     Petitioner derived its income from its credit card program

from four sources:    The merchants paid through the merchant

discounts.   Merchant banks (banks other than the subsidiary

issuing banks) paid through the interchange fees.    Cardholders

with outstanding (revolving) balances paid interest for the use

of that credit.   All cardholders were charged the annual fee, and

the amount of the annual fee was the same regardless of credit

line, amount charged, or the amount of the outstanding balance,

if any.   It is similarly difficult to match any particular type

of income with particular services performed by petitioner.     See

supra note 5.

     Nevertheless, cardholders paid annual fees and received

services.    All cardholders were issued at least one plastic card

each year and had the right to use that card, subject to

cancellation by petitioner at any time.    However, if petitioner

cancelled the card, it refunded the annual fee on a pro rata
                               - 14 -

basis for the number of months remaining in the 1-year period.

Cardholders had the opportunity to use their cards for payment at

a large number of businesses, negating the risk of carrying large

amounts of cash or the restrictions on writing checks.

Cardholders had access to petitioner's customer service staff on

a 24-hour basis, and the right to withhold payment on disputed

charges.   We agree with petitioner that its cardholders remitted

the annual fees as payment for services.

Clear Reflection of Income

     The general rule for the taxable year of inclusion of income

appears in section 451.    Section 451(a) requires that:

     The amount of any item of gross income shall be
     included in the gross income for the taxable year in
     which received by the taxpayer, unless, under the
     method of accounting used in computing taxable income,
     such amount is to be properly accounted for as of a
     different period.

Section 446(a) provides that "Taxable income shall be computed

under the method of accounting on the basis of which the taxpayer

regularly computes his income in keeping his books."    The accrual

method of accounting is one permissible method of computing

taxable income.    Sec. 446(c)(2).   Petitioner is an accrual basis

taxpayer and has kept its books regularly in accordance with this

method.    Section 1.446-1(c)(ii), Income Tax Regs. provides:

          Accrual method. Generally, under an accrual
     method, income is to be included for the taxable year
     when all the events have occurred which fix the right
     to receive such income and the amount thereof can be
     determined with reasonable accuracy. * * *
                               - 15 -

       However, "merely because the method of accounting a taxpayer

employs is in accordance with generally accepted accounting

procedures, this 'is not to hold that for income tax purposes it

so clearly reflects income as to be binding on the Treasury.'"

Commissioner v. Idaho Power Co., 418 U.S. 1, 15 (1974) (quoting

American Automobile Association v. United States, 367 U.S. 687,

693 (1961)).    Financial accounting and income tax accounting

methods have different objectives.      Thor Power Tool Co. v.

Commissioner, 439 U.S. 522, 542-543 (1979).     As stated by the

Supreme Court:

       The primary goal of financial accounting is to provide
       useful information to management, shareholders,
       creditors, and others properly interested; the major
       responsibility of the accountant is to protect these
       parties from being misled. The primary goal of the
       income tax system, in contrast, is the equitable
       collection of revenue; the major responsibility of the
       Internal Revenue Service is to protect the public fisc.
       * * * Given this diversity, even contrariety, of
       objectives, any presumptive equivalency between tax and
       financial accounting would be unacceptable.

Id..    Nevertheless, "where a taxpayer's generally accepted method

of accounting is made compulsory by the regulatory agency and

that method clearly reflects income, it is almost presumptively

controlling of federal income tax consequences."      Commissioner v.

Idaho Power Co., supra at 15 (fn. ref. omitted).

       If the taxpayer's method of accounting does not clearly

reflect income, the computation of taxable income shall be made

under such method as, in the opinion of the Secretary, does

clearly reflect income.    Sec. 446(b).   Respondent has broad
                             - 16 -

powers in determining whether accounting methods used by a

taxpayer clearly reflect income.   Commissioner v. Hansen, 360

U.S. 446, 467 (1959).

     Where accrual method taxpayers have received advance

payments for services and have unrestricted access to those

funds, courts have upheld respondent's determinations that these

payments are to be included in income in the year of receipt.

Schlude v. Commissioner, 372 U.S. 128 (1963); American Automobile

Association v. United States, 367 U.S. 687 (1961);     Automobile

Club of Michigan v. Commissioner, 353 U.S. 180 (1957); RCA Corp.

v. United States, 664 F.2d 881 (2d Cir. 1981); Angelus Funeral

Home v. Commissioner, 407 F.2d 210 (9th Cir. 1969), affg. 47 T.C.

391 (1967); S. Garber, Inc. v. Commissioner, 51 T.C. 733 (1969);

Popular Library, Inc. v. Commissioner, 39 T.C. 1092 (1963).     But

cf. Artnell Co. v. Commissioner, 400 F.2d 981 (7th Cir. 1968),

revg. and remanding 48 T.C. 411 (1967); Boise Cascade Corp. v.

United States, 208 Ct. Cl. 619, 530 F.2d 1367 (1976); Collegiate

Cap & Gown Co. v. Commissioner, T.C. Memo. 1978-226.    While

respondent focuses on such cases, particularly the Supreme

Court's Schlude-American Automobile Association-Automobile Club

of Michigan trilogy, petitioner does not challenge them.

Petitioner instead relies upon exceptions thereto that respondent

has chosen to make administratively.

     Petitioner's case is squarely based on Rev. Proc. 71-21,

1971-2 C.B. 549, the use of which it says should be available to
                               - 17 -

it.    Respondent's primary objection to petitioner's use of that

revenue procedure is the argument that the annual credit card

fees do not represent payments for services under the cardholder

agreement, a factual issue we have resolved in petitioner's

favor.    Almost as an afterthought, respondent argues that

petitioner's accounting method for these annual fees does not

clearly reflect income, an argument based upon an insistence that

Rev. Proc. 71-21 requires a matching of income and expense on an

individual cardholder basis.    Petitioner admittedly does not

track the expenses for these services on an individual cardholder

basis.    Having then decided that the revenue procedure, as thus

interpreted by respondent, does not apply to petitioner,

respondent concludes there is thus no abuse of discretion in

denying petitioner the use of Rev. Proc. 71-21.    We think

respondent's approach is inconsistent with the intended purpose

and benefit of the revenue procedure, that petitioner's pro rata

reporting of these fees over a 12-month period satisfies Rev.

Proc. 71-21, and that respondent's denial of the benefits of the

revenue procedure to petitioner amounts to an abuse of

discretion.

       In 1970, respondent issued Rev. Proc. 70-21, 1970-2 C.B.

501,

       to implement an administrative decision, made by the
       Commissioner of Internal Revenue in the exercise of his
       discretion under section 446 of the Internal Revenue
       Code of 1954, to allow accrual method taxpayers in
       certain specified and limited circumstances to defer
                              - 18 -

     the inclusion in gross income for Federal income tax
     purposes of payments received (or amounts due and
     payable) in one taxable year for services to be
     performed by the end of the next succeeding taxable
     year. * * *

Rev. Proc. 70-21, sec. 1.   The following year, respondent issued

Rev. Proc. 71-21, 1971-2 C.B. 549, which superseded Rev. Proc.

70-21, but incorporated the basic principles of the earlier

revenue procedure.   Rev. Proc. 71-21, sec. 2, states:

          In general, tax accounting requires that payments
     received for services to be performed in the future
     must be included in gross income in the taxable year of
     receipt. However, this treatment varies from financial
     accounting conventions consistently used by many
     accrual method taxpayers in the treatment of payments
     received in one taxable year for services to be
     performed by them in the next succeeding taxable year.
     The purpose of this Revenue Procedure is to reconcile
     the tax and financial accounting treatment of such
     payments in a large proportion of these cases without
     permitting extended deferral in the time of including
     such payments in gross income for Federal income tax
     purposes. Such reconciliation will facilitate
     reporting and verification of such items from the
     standpoint of both the taxpayers affected and the
     Internal Revenue Service. * * * [Emphasis added.]

Rev. Proc. 71-21, sec. 3.02, further provides that:

          An accrual method taxpayer who, pursuant to an
     agreement (written or otherwise), receives a payment in
     one taxable year for services, where all of the
     services under such agreement are required by the
     agreement as it exists at the end of the taxable year
     of receipt to be performed by him before the end of the
     next succeeding taxable year, may include such payment
     in gross income as earned through the performance of
     the services * * *

The amount of the advance payment includable as gross receipts in

gross income in the taxable year of receipt must be no less than

the amount of such payments included for purposes of the
                              - 19 -

taxpayer's books and records and all reports to shareholders,

partners, other proprietors or beneficiaries and for credit

purposes.   Rev. Proc. 71-21, sec. 3.11.   Petitioner uses the same

method for financial, regulatory, and tax accounting purposes and

thus satisfies this requirement.   Taxpayers who avail themselves

of this procedure must maintain adequate books and records so

that the amount deferred on the income tax return for any year

can be verified.   Rev. Proc. 71-21, sec. 4.   The parties have

stipulated that petitioner's books and records satisfy this

requirement.

     Petitioner relies on Rev. Proc. 71-21 for its method of

accounting for these annual credit card fees.    Section 3.14 of

Rev. Proc. 71-21 provides that the deferral of income in

accordance with this procedure will be treated as an acceptable

method of accounting under section 446 as long as the method is

consistently used by the taxpayer.     Petitioner consistently used

the same method of accounting for these fees from the time it

instituted the fees in October of 1980 through the taxable year

1985.9

     Respondent cites section 3.06 of Rev. Proc. 71-21 and argues

that since petitioner has not correlated the fees to specific

services, petitioner is unable to avail itself of Rev. Proc. 71-

     9
        Respondent seems to argue on brief that petitioner
improperly changed its accounting method without obtaining
respondent's consent. That is not the case.
                              - 20 -

21.   Section 3.02 permits the taxpayer to include the payments in

income "as earned through the performance of the services".

Section 3.06 sets forth methods that may be used in determining

the amount of an advance payment that is earned in a taxable year

where the agreement requires the performance of contingent

services.   Section 3.06 reads:

           In any case in which an advance payment is
      received pursuant to an agreement which requires the
      taxpayer to perform contingent services, the amount of
      an advance payment which is earned in a taxable year
      through the performance of such services may be
      determined (a) on a statistical basis if adequate data
      are available to the taxpayer; (b) on a straight-line
      ratable basis over the time period of the agreement if
      it is not unreasonable to anticipate at the end of the
      taxable year of receipt that a substantially ratable
      portion of the services will be performed in the next
      succeeding taxable year; or (c) by the use of any other
      basis that in the opinion of the Commissioner, results
      in a clear reflection of income.

The language of section 3.06 instructs the taxpayer as to how to

report the payments from contingent service agreements; it does

not preclude such payments for contingent services from the

application of Rev. Proc. 71-21.    Also, examples 4 and 5 given in

section 3.12 refer to contingent service providers and do not

require a matching of the service contract income with

performance of specific services.

      We have found that the annual credit card fees were payments

for services provided to or made available to the cardholders.

The period of the agreement covered by the fee was 12 months;

thus, all services would be performed within a 1-year period and
                                - 21 -

always by the end of the next succeeding taxable year.

     Petitioner reported the annual fees in income on a pro rata

basis over a 12-month period.    Since the full range of services,

including contingent services performed on the cardholder's

demand, would be available over the 12-month period for which the

fee was paid, it would be "not unreasonable" to anticipate that a

substantially ratable portion would be performed or available to

be performed in whatever portion of the 1-year period remained at

the end of any given taxable year.       The cardholder pays for

services to be available at all times over the 1-year period of

the agreement, whether or not the particular cardholder avails

himself of those services.

     Petitioner's pro rata inclusion of income over the 12-month

period is reasonable and within the purview of Rev. Proc. 71-21.

We think the revenue procedure does not require the type of

matching of income and expense that respondent insists upon.       The

revenue procedure permits accrual basis taxpayers to defer the

inclusion in gross income of payments received (or due and

payable) in one year for services to be performed by the end of

the next succeeding taxable year.    Petitioner's method does that.

The purpose of the revenue procedure was to reconcile tax and

financial accounting treatment of such payments without

permitting extended deferral beyond the end of the next

succeeding taxable year.   Petitioner's method is that required

for financial and regulatory accounting purposes; hence the
                                 - 22 -

method reconciles financial and regulatory accounting with tax

accounting and certainly without undue deferral.        The purpose of

this reconciliation is to "facilitate reporting and verification

of such items from the standpoint of both the taxpayers affected

and the Internal Revenue Service."        Rev. Proc. 71-21, sec. 2.

Petitioner's method does that.     Respondent's demand for a

matching of the fee income with the expenses incurred for

specific services would impose an undue burden on petitioner.

Finally, if the credit card is cancelled, petitioner makes a pro

rata refund of the fee for the number of months remaining in the

1-year period.   Thus, if anything, petitioner's method provides a

more reasonable matching of income and expense than what

respondent seems to espouse.10

     We conclude that petitioner is eligible to defer its income

from credit card fees under Rev. Proc. 71-21.        Respondent has

declared that deferral of income according to this revenue

procedure is an acceptable method of accounting.        Rev. Proc. 71-

21, sec. 3.14.

     Where respondent fails to observe self-imposed limits upon

     10
        This case is factually distinguishable from Signet
Banking Corp. v. Commissioner, 106 T.C. ___ (1996). The
cardholder agreement in that case provided that the membership
fee was nonrefundable and was paid in consideration of the
issuance of the card and the establishment of the cardholder's
credit limit. The agreement here was materially different. The
annual fee was paid for services and was refundable to the
cardholder on a pro rata basis if the card was cancelled for any
reason during the 1-year period.
                             - 23 -

her exercise of discretion and has invited reliance upon such

limitations, an abuse of discretion can occur.     Capitol Fed. Sav.

& Loan v. Commissioner, 96 T.C. 204, 217 (1991).    We conclude

that here respondent has abused her discretion in denying

petitioner the use of Rev. Proc. 71-21.

     In accordance with the above holdings,

                                   Decision will be entered

                              under Rule 155.