## Facts

- American Express, an accrual-method taxpayer, charged cardholders a lump-sum annual fee for a 12-month period of charge-card privileges.
- American Express historically included the full annual fee in income in the year billed, despite the cardholder relationship extending into the next taxable year.
- Revenue Procedure 71-21 permitted limited deferral of certain advance payments received in one year for services performed by the end of the next year, subject to conditions (including bookkeeping/segregation requirements).
- American Express sought IRS consent to change its accounting method to recognize annual-fee income ratably (one-twelfth per month) over the 12-month term.
- The IRS denied the request, treating the annual fee primarily as consideration for a credit-related right (ability to make purchases on credit), not “services” within Rev. Proc. 71-21.
- American Express filed a refund claim; after IRS denial, it sued in the Court of Federal Claims.
- The Court of Federal Claims granted summary judgment for the United States, deferring to the IRS’s interpretation of Rev. Proc. 71-21.
- American Express appealed to the Federal Circuit.

## Issues

1. Whether annual charge-card fees are “advance payments for services” eligible for income deferral under Revenue Procedure 71-21.
2. Whether, and to what extent, courts should defer to the IRS’s interpretation of its own revenue procedure in applying the deferral conditions.

## Decision

- The Federal Circuit affirmed summary judgment for the United States.
- The court held the IRS reasonably interpreted Rev. Proc. 71-21 to exclude annual charge-card fees as payments not primarily for services to be performed in the following year.
- The court gave substantial deference to the IRS’s long-standing interpretation of the revenue procedure.
- The court concluded American Express was required to include the entire annual fee in income in the year it was billed and was not entitled to a refund.
- The court also accepted the IRS’s position that Rev. Proc. 71-21’s conditions, including segregation/bookkeeping requirements, were not satisfied for the claimed deferral.

## Legal Principles

- Accrual-method taxpayers generally must include income when the right to receive it is fixed and the amount is determinable; administrative deferral guidance operates as a limited concession rather than a statutory entitlement.
- Revenue Procedure 71-21 permits deferral only for qualifying advance payments for services and only if specified conditions (including accounting and segregation requirements) are met.
- Courts may give substantial deference to an agency’s reasonable, consistent interpretation of its own sub-regulatory guidance (including a revenue procedure), particularly where the guidance provides a discretionary safe harbor.
- An agency may reasonably distinguish between payments for services and payments for credit-related or property-like rights when determining eligibility for advance-payment deferral.

## Conclusion

The Federal Circuit upheld the IRS’s denial of American Express’s proposed deferral method, deferring to the IRS’s reasonable interpretation that annual charge-card fees primarily compensated a credit-related right rather than future services and therefore had to be included in income when billed.


Am. Express Co. v. United States, 262 F.3d 1376 (Fed. Cir. 2001)