The Fourth Circuit today issued a published opinion affirming a Tax Court judgment rejecting various claims by Capital One related to taxes owed on late-fee income and deductions for projected costs of miles rewards redemptions. Judge Wilkinson wrote the opinion for the panel in Capital One Financial Corporation v. Commissioner, which was joined in by Judges Niemeyer and Floyd.
Tax law junkies can read the opinion in full. For everyone else, here a few excerpts to provide some of the flavor of the opinion, which is quite interesting even to a non-tax specialist reader:
- “As to late-fee income, Capital One seeks to retroactively change accounting methods years after it selected and implemented an alternative method. The purported change would reduce Capital One’s taxable income for 1998 and 1999 byapproximately $400,000,000. To allow such changes without the prior consent of the Commissioner would roil the administration of the tax laws, sending revenue projection and collection into a churning and unpredictable state. Belated attempts to change accounting methods “would require recomputationand readjustment of tax liability for subsequent years and impose burdensome uncertainties upon the administration ofthe revenue laws.” Pac. Nat’l Co. v. Welch, 304 U.S. 191, 194(1938). For that reason, the Supreme Court has held that once a taxpayer has reported income according to a particular method it must live with that choice—the taxpayer has “madean election that is binding upon it and the commissioner.” Id.at 195.
- “While we appreciate Capital One’s expressed enthusiasm for complying with the requirements of the TRA, it is impossible to overlook its financial incentives to make the retroactive change. Capital One maintains that it was not trying to obtain a better tax result but only to comply with the TRA. Capital One’s persistent effort in litigation to reduce its taxable income by approximately $400,000,000, however, speaks for itself. In all events, the alleged reason or motive for a change in method of accounting does not eliminate the need to obtain consent.”
- “There is a line between a loan and a sale and it is important that we keep it bright. To characterize a loan as the sale of lending services is artful pleading and clever wordsmithing, but it is dubious law to say the least.”