                           106 T.C. No. 5



                     UNITED STATES TAX COURT



           SIGNET BANKING CORPORATION, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No. 7887-92.        Filed February 29, 1996.



     Christopher Kliefoth and Ralph I. Petersberger, for

petitioner.

     Phillip A. Pillar and Scott D. Anderson, for respondent.



          P is in the banking business. P issued credit
     cards. P charged its credit card holders an annual
     membership fee. The cardholder agreement provided that
     the fee was paid in consideration of the issuance of a
     card and establishment of a credit limit. The
     agreement stated that P could close a cardholder’s
     account at any time and that the annual membership fee
     was nonrefundable. P is an accrual method taxpayer.
                               - 2 -


          Held, it was not an abuse of discretion for R to
     conclude that P must report annual membership fees in
     income in the year of receipt.

          Held, further, Rev. Proc. 71-21, 1971-2 C.B. 549,
     does not permit P to report income from annual
     membership fees later than the year of receipt.




     COLVIN, Judge:   Respondent determined deficiencies in

petitioner's Federal income tax of $233,464 for 1982, $689,257

for 1983, $1,177,475 for 1984, and $1,529,931 for 1985.

     The sole issue for decision is whether annual membership

fees petitioner received from its credit card customers are

includable in income in the year in which petitioner received

them, or whether petitioner may defer the income over a 12-month

period under Rev. Proc. 71-21, 1971-2 C.B. 549.

     Under the cardholder agreements in effect during the years

in issue, the annual membership fee was paid in consideration of

the issuance of a card and the establishment of a credit limit,

petitioner could close any account at any time, and the fee was

nonrefundable.   Petitioner’s right to receive the annual

membership fees was not contingent on petitioner’s performance of

any service after the year of receipt.   We hold that it was not

an abuse of discretion for respondent to conclude that petitioner

must include the fees in income in the year of receipt.
                                 - 3 -


     Section references are to the Internal Revenue Code in

effect for the years in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.

                          FINDINGS OF FACT

1.   Petitioner

     Petitioner is a Virginia bank holding company that has its

principal place of business in Richmond, Virginia.    Petitioner is

the parent of a consolidated group of corporations and the

successor to the Bank of Virginia Co. (BOVACO).    BOVACO was the

parent of an affiliated group of corporations that filed

consolidated Federal income tax returns from 1982 to 1985.

BOVACO changed its name to Signet in 1986.    Petitioner is in the

banking business.    Petitioner is an accrual method taxpayer.

2.   The MasterCard Credit Cards

     In 1953, petitioner started the BOVA (Bank of Virginia)

Charge Plan.   In 1967, petitioner was a founding member of the

Interbank Card Association, which later became MasterCard

International.    Before, during, and after the years at issue,

petitioner issued MasterCards and a small number of Visa credit

cards.1




     1
       The parties agreed to refer to petitioner’s cardholders as
MasterCard cardholders even though respondent's determination
also applies to annual membership fees charged to Visa
cardholders.
                                - 4 -


     Petitioner’s cardholders may use their MasterCards to charge

the cost of goods and services purchased from participating

merchants.   The merchants submit MasterCard sales receipts to

their merchant bank.   The merchant bank processes merchants’

credit card transactions.   The merchant bank pays the merchants

the amount of the charges less a merchant discount.   The merchant

discount is a set percentage, e.g., 2-1/4 percent, of total

charges.   The merchant bank transfers the sales draft through

interchange to an issuing bank such as petitioner.    The issuing

bank pays the merchant bank the amount of the sales draft less an

interchange fee (for example, 1-1/2 percent of the sales draft).

The interchange fee is paid by the merchant bank to the issuing

bank.   The issuing bank bills the cardholder for the full amount

of the sales draft.

     Before 1981, petitioner earned interchange fees from

merchant banks.    Petitioner earned merchant discounts when it was

both a merchant bank and an issuing bank.

     Before 1981, petitioner had two primary sources of income

from MasterCard cardholders:   (a) About 90 percent was from

finance charges paid by cardholders who paid less than their full

balance, and (b) about 10 percent was from interchange fees

described above.   Petitioner also received from cardholders over

limit fees (not defined in the record), cash advance fees until

May 1983, and other charges, including late payments and credit
                                - 5 -


life insurance.    Petitioner also received a fee of 2 percent of

the transaction amount for automated teller machine (ATM) and

check access until May 1983.

3.   Annual Membership Fees

     a.   Petitioner’s Decision to Charge an Annual Membership
          Fee

     In 1980, petitioner's MasterCard business lost money because

the cost of funds used by petitioner was high compared to the

finance charge it could apply to MasterCard cardholders.

     Petitioner had three types of cardholders.    About 70 percent

were in the "revolver" group (i.e., those who paid less than the

balance due each month and incurred finance charges on the

outstanding balance).   About 30 percent were "convenience users"

(i.e., those who used their cards, paid their balance in full,

and thus did not owe finance charges).    A small number were

"inactive" (i.e., those who may have used their MasterCards as

identification but did not use them to pay for goods or

services).   Convenience users generated interchange fees but not

finance charges.   As a group they were minimally profitable.

The inactive group cost petitioner money but generated no income.

Petitioner decided to impose an annual membership fee to recover

some of the cost of delivering services to each group.

     Petitioner began to charge its MasterCard cardholders an

annual membership fee in April 1981.    Thereafter, petitioner's

credit card division derived income from commissions deducted
                                - 6 -


from amounts paid to merchants (merchant discount), interchange

fees, annual membership fees, finance charges paid by

cardholders, cash advance fees (until May 1983), over limit fees,

and other charges (such as late payment and credit life fees).

     Other major banks were charging annual membership fees for

credit cards when petitioner decided to charge an annual fee.

Petitioner was one of the first Virginia banks to do so.

     b.     Annual Membership Fees Charged by Petitioner

     To become or remain a MasterCard cardholder after April 1,

1981, petitioner required payment of an annual membership fee of

$15 for a regular MasterCard or $36 for a Special Edition Gold

MasterCard or a commercial account.     On April 1, 1981, petitioner

began to charge its regular MasterCard cardholders an annual

membership fee of $15 regardless of the cardholder’s credit line,

usage, balance (if any) carried from month-to-month, or credit

standing.    Petitioner first billed cardholders for the annual

membership fee in July 1981.    In 1986, petitioner raised the $15

annual membership fee to $18 per year.    From 1983 to 1985,

petitioner also offered affinity group (i.e., alumni of a

particular university) MasterCards for $18 and $20.

     c.     Implementation of the Annual Membership Fee

     Petitioner sent its cardholders a disclosure statement as

required by Regulation Z, 12 C.F.R. sec. 226.9(b) (1981), stating

the change in contract terms and a letter describing the services
                                - 7 -


provided to cardholders.   William F. Binns, petitioner's vice

president in charge of credit card services, answered telephone

and written inquiries objecting to the new fee.      He told

cardholders that the card was a good value for $1.25 a month.

     Petitioner projected that, as a result of imposing the

annual membership fee, it would lose 25 percent of its MasterCard

accounts, including most in the inactive group and many of the

convenience users.   Although many closed their accounts, the

number who did so was less than petitioner had projected.

     From 1983 to 1985, petitioner imposed the annual membership

fee at the start of each cardholder’s membership year.

Petitioner billed the fee on the first statement for that year.

     From 1983 to 1985, petitioner typically charged cardholders

who incurred interest charges on their balances an 18-percent

annual percentage rate.    Petitioner charged its Gold MasterCard

customers a lower rate and charged some of its non-Virginia

customers up to 21 percent.   Petitioner considered its Gold

MasterCard customers to be lower risks even though they typically

carried higher monthly balances.

     From 1983 to 1985, petitioner occasionally waived the first

year’s membership fee if the customer was a member of an affinity

group, waived the annual fee for the year in response to some

customer complaints, and waived the annual fee for some active

customers who threatened to leave.      Otherwise, petitioner
                              - 8 -


canceled the MasterCard accounts of cardholders who did not pay

the annual membership fee.

     Petitioner had the following number of MasterCard accounts

at yearend:

           Year               Number of MasterCard Accounts

           1983                          682,143
           1984                          759,415
           1985                          853,498

4.   MasterCard Cardholder Agreements

     As required by Regulation Z (12 C.F.R. sec. 226.9(a)),

petitioner gave a copy of a charge plan customer agreement and

truth in lending disclosure (the cardholder agreement) to

everyone who opened an account.   Thereafter, petitioner did not

give a copy of the agreement to each cardholder each year.    As

required by Regulation Z (12 C.F.R. sec. 226.9(c), petitioner

notified cardholders when it changed the terms of the agreement.

     The cardholder agreement provided, among other things, that:

the annual membership fee was paid “in consideration of” the

issuance of a card and the establishment of a credit limit,

cardholders were required to surrender their cards upon demand,

petitioner could cancel a card at any time, and the annual

membership fee was nonrefundable.   For example, petitioner’s

cardholder agreement, effective April 1981, stated in part as

follows:

     OTHER CHARGES.   * * *
                              - 9 -


     4. You agree to pay a non-refundable annual membership
     fee of $15.00 in consideration of the issuance of your
     Card and the establishment of your credit limit. The
     fee will be added to your purchase balance. The fee
     will be effective April 1, 1981. * * *2

     CLOSING THE ACCOUNT. Except where specific notice is
     required by law, we can close your Account at any time
     by phoning you or by writing you at the address shown
     on our records. If you want to close your Account, you
     must give us notice in writing. * * *

     The agreement urges cardholders to read and retain a copy of

the agreement because “when you use your Account, you’ve agreed

to the terms in this agreement.”

     The agreement also states that the cardholder may use the

card to buy goods and services wherever the card is honored and

to get cash advances in various ways; that petitioner will send a

periodic statement to the cardholder; that the cardholder should

notify petitioner if the card is lost or stolen; that the

cardholder may be liable for misuse of his or her card up to $50;

that the cardholder has certain rights under the Fair Credit



     2
       Similarly, petitioner’s cardholder agreement and Truth-in-
Lending Disclosure, effective September 1984, provided in part as
follows:

     OTHER CHARGES.   * * *

     4. You agree to pay a non-refundable annual membership
     fee of $15.00 in consideration of the issuance of your
     Card and the establishment of your credit limit. The
     membership fee will be charged on your Periodic
     Statement each year in the month in which you opened
     your account. For Commercial Accounts the annual
     membership fee will be $36.00.
                              - 10 -


Billing Act if there is a billing dispute; and that petitioner

may change the cardholder agreement at any time.

5.   Petitioner’s Credit Card Services and Business Practices

     All of petitioner’s MasterCard cardholders had available to

them the following from 1983 to 1985:   Periodic itemized

statements of account activity, toll-free customer telephone

service, ATM access, prompt replacement of lost and stolen cards

and fraud protection,3 worldwide merchant acceptance, consumer

protection for purchases (i.e., if a cardholder has a problem

with goods or services bought with a credit card, he or she

generally has the right not to pay the remaining amount due after

trying in good faith to return the item or giving the merchant a

chance to correct the problem), free additional cards, a means of

identification, check access (petitioner provides checks bearing

a cardholder’s account number which the cardholder may use to buy

goods or services from merchants not honoring the card), credit

bureau reporting, processing of payments, changes in credit

limits, and verification of available credit when cardholders

used their cards.   Petitioner provided additional services to

some of its cardholders:   travel, accident, and rental car

insurance, rental car discounts, emergency cash or airline

     3
       Under Regulation Z, 12 C.F.R. sec. 226.12(b), the
cardholder may be required to pay the first $50 of unauthorized
use, but petitioner rarely did so. Petitioner asked MasterCard
cardholders who had unusual activity on their cards if their card
was lost or stolen.
                               - 11 -


tickets, and credit card registration.    Petitioner provided most

of these services before it imposed an annual membership fee.

Petitioner provided some services only if the cardholder used the

card to make a specific purchase, e.g., free collision insurance

with the rental of a car. Some of these services increased in

value after petitioner imposed the annual membership fee, e.g.,

the amount of accident insurance.    Petitioner provided these

services year-round, although use of them varied seasonally.

       Petitioner generally issued new MasterCards to its

cardholders every 2 years.    Petitioner reissued cards evenly

throughout the year.    Reissuance of a card did not necessarily

coincide with the date petitioner charged the annual membership

fee.

       Petitioner established a customer's MasterCard credit limit

when petitioner approved a customer’s application for the

account.    Thereafter, petitioner occasionally changed the credit

limit at a cardholder’s request.    Petitioner sometimes raised

credit limits to accommodate cardholders and sometimes lowered

credit limits to reduce petitioner’s risk.    Credit limit changes

were not related to the charging and payment of the annual

membership fee.

6.     Petitioner’s Reporting of the Annual Membership Fees

       Petitioner reported the annual membership fees it received

from 1983 to 1985 ratably over a 12-month period for Federal
                               - 12 -


income tax, financial, accounting, and regulatory reporting

purposes.   Petitioner reported about 50 to 75 percent of the

annual membership fees it received each year and deferred the

balance to the next year.   Petitioner reported the deferred

portion as income in the following year for tax, financial, and

regulatory purposes.

7.   Joint Venture Agreement

     On March 26, 1986, petitioner and Fidelity Bank & Trust Co.

(Fidelity) signed a joint venture agreement under which: (a)

Fidelity agreed to market petitioner's MasterCards to some of its

customers, (b) petitioner agreed to service the accounts (send

periodic statements, receive and process payments, handle

merchant charge authorizations, respond to customer inquiries,

etc.), and (c) Fidelity and petitioner agreed to divide any

profits earned on the accounts.   Petitioner estimated its

servicing costs based on its actual 1985 costs of servicing

MasterCard accounts and its budgeted 1986 costs.   Under the

agreement, petitioner received a monthly servicing fee of $2 per

month per account or $24 per year for the first 12 months.      After

the first 12 months, upon 60 days’ notice to Fidelity petitioner

could raise the monthly servicing fee to cover actual increases

in expenses in servicing the accounts.
                              - 13 -


                              OPINION

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

     Petitioner argues that, under Rev. Proc. 71-21, 1971-2 C.B.

549, it may report its income from annual membership fees ratably

over a 12-month period on the grounds that the fees were for

services it performed ratably over that period.

     Income must be reported in the taxable year in which the

taxpayer receives it, unless, under the taxpayer’s method of

accounting, the item of income is properly accounted for in a

different period.   Sec. 451(a).   Petitioner is an accrual method

taxpayer.   An accrual method taxpayer recognizes income when all

the events have occurred which fix the right to receive the

income and the amount of the income can be determined with

reasonable accuracy.   Schlude v. Commissioner, 372 U.S. 128, 137

(1963); secs. 1.446-1(c)(1)(ii), 1.451-1(a), Income Tax Regs.

     Under Rev. Proc. 71-21, supra, an accrual basis taxpayer

that receives payments in one taxable year for services to be

performed not later than the next taxable year may, in certain

circumstances, include the payments in gross income ratably as

earned through the performance of the services, rather than when

received.   Rev. Proc. 71-21, supra at 549-550, 1971-2 C.B. 549,

states in part:

     Section 1.   Purpose

          The purpose of this Revenue Procedure is to
     implement an administrative decision, made by the
     Commissioner in the exercise of his discretion under
                          - 14 -


section 446 of the Internal Revenue Code of 1954, to
allow accrual method taxpayers in certain specified and
limited circumstances to defer 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. Amounts due and payable
are, for purposes of this Revenue Procedure, treated as
payments received.

Section 2.   Background

     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.

Section 3.   Permissible Methods

     .01 An accrual method taxpayer who receives a
payment for services to be performed by him in the
future and who includes such payment in gross income in
the year of receipt is using a proper method of
accounting.

     .02 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, subject to the limitations provided in
sections 3.07, 3.08, and 3.11. However, if the
inclusion in gross income of payments received is
                                - 15 -


     properly deferred under the preceding sentence and for
     any reason a portion of such services is not performed
     by the end of the next succeeding taxable year, the
     amount allocable to the services not so performed must
     be included in gross income in such next succeeding
     year, regardless of when (if ever) such services are
     performed.

                    *   *   *     *      *   *   *

          .06 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.

                    *   *   *     *      *   *   *

          .11 The amount of any advance payment includible
     as gross receipts in gross income in the taxable year
     of receipt by a taxpayer under the foregoing rules
     shall be no less than the amount of such payment
     included as gross receipts in gross income for purposes
     of his books and records and all reports (including
     consolidated financial statements) to shareholders,
     partners, other proprietors or beneficiaries and for
     credit purposes.

2.   Whether Petitioner Performed Services for Cardholders
     Ratably Over 12 Months

     Petitioner points out that it performed many services for

its MasterCard cardholders throughout the year and contends that

it earned income from annual membership fees ratably over the 12-

month period covered by those fees.       We disagree with

petitioner’s contention.
                              - 16 -


     The cardholder agreement states that the annual membership

fee is nonrefundable and is paid in consideration of opening an

account and establishing a credit limit.    Petitioner performed

all of the acts that it was required to perform in order to be

entitled to the annual membership fee when it issued a credit

card to the customer and established a credit limit.    Petitioner

does not deny that it can cancel a member’s credit card at any

time, or that its rights and obligations are anything other than

as stated in the cardholder agreement.   Once petitioner opened an

account for a customer, petitioner had an unrestricted right to

that customer’s annual membership fee.   Petitioner had no duty

under the agreement to return any part of the fee even if

petitioner or the cardholder closed the account immediately

thereafter.

     Petitioner contends that it received the annual membership

fee in payment for numerous services it provided to cardholders

throughout the year.   Petitioner’s contention might be well taken

if we disregard the cardholder agreement.    Under the agreement,

all that petitioner was required to do to be entitled to keep the

nonrefundable annual membership fee was to issue a card and

establish a credit limit.   Respondent contends that those actions

are not within the scope of Rev. Proc. 71-21, 1971-2 C.B. 549,

because they are not services.   We need not decide respondent’s
                               - 17 -


contention because, even if they are services, they are clearly

not provided ratably over the 12-month period.4

     Petitioner views the annual membership fee as paid for the

various cardholder services.   Petitioner contends that the cards

would be useless if it did not provide services such as

authorization of purchases, sending of statements, processing of

payments, responding to cardholder questions, and replacing lost

or stolen cards.   We agree, but the cardholder agreement, written

by petitioner, clearly states the payment is for something other

than those services.

     Petitioner argues that many services are “contemplated” by

the agreement.   Petitioner points out that the agreement states

that the cardholder may use the card to buy goods and services

wherever the card is honored and to get cash advances in various

ways; that petitioner will send a periodic statement to the

cardholder; that the cardholder should notify petitioner if the

card is lost or stolen; that the cardholder may be liable for

misuse of his or her card up to $50; that the cardholder has

certain rights under the Fair Credit Billing Act if there is a


     4
       We do not decide whether annual membership fees must
be reported in the year of receipt if they are governed by
cardholder agreements which differ substantially from the ones
at issue here. As stated, the cardholder agreement at issue
here provides that the fee is nonrefundable and is paid in
consideration of issuance of the card and establishment of a
credit limit, and the card may be canceled at any time by
petitioner or the cardholder. Cf. Barnett Banks of Florida,
Inc. v. Commissioner, 106 T.C. ___ (1996), filed today.
                               - 18 -


billing dispute; and that petitioner may change the cardholder

agreement at any time.   However, the cardholder has no assurance

that those services will continue; petitioner can cancel the card

at any time without refunding the annual membership fee.

     Similarly, petitioner argues that it should be allowed to

defer reporting the fees at issue here because they are called

“annual membership fees”.   We disagree because the name of the

fee does not override (nor does petitioner contend that it

overrides) the provisions of the agreement that establish the

rights and obligations of the parties.

     Petitioner argues that respondent’s reliance on the

cardholder agreement improperly places form over substance.

Under petitioner’s argument, the “substance” of the transaction

is that petitioner provides many services for cardholders

throughout the year, and the “form” of the transaction is found

in the cardholder agreement.   We disagree.   The cardholder

agreement establishes the rights of cardholders and the card

issuer.   It provides that the payment is in consideration of the

issuance of the card and establishment of a credit limit.      An

accrual method taxpayer recognizes income when all of the events

have occurred which fix the right to receive the income.      Secs.

1.446-1(c)(1)(ii), 1.451-1(a), Income Tax Regs.    Contrary

to petitioner’s contention, the rights and obligations of the

parties are the substance of the matter.   Even though petitioner

urged cardholders to read and retain a copy of the agreement
                               - 19 -


(because “when you use your Account you’ve agreed to the terms in

this agreement”), petitioner in effect argues here that it is not

so important after all.

     Petitioner points out that Rev. Proc. 71-21, supra, says

that services must be provided by the close of the taxable year

following the year of payment and that it does not say that the

agreement must require services to be performed in the later

year.   Petitioner’s point is literally true, but it is at best

misleading.   First, to allow deferral of reporting of income to a

time later than all the events occurred which fix the taxpayer’s

right to receive the income is contrary to undisputed accrual

accounting principles.    See secs. 1.446-1(c)(1)(ii), 1.451-1(a),

Income Tax Regs.   Second, Rev. Proc. 71-21, supra, allows income

to be reported in the next taxable year “as earned through the

performance of * * * services”.   Rev. Proc. 71-21, sec. 3.02.    It

is inherent in this language that petitioner must show that the

payment was made at least in part for services to be performed in

the next taxable year.    See also id. secs. 1 and 2.   As discussed

above, the cardholder agreement clearly establishes that this is

not the case here.

     Petitioner reissued credit cards evenly throughout the year,

and reissuance did not necessarily coincide with the date

petitioner charged the annual membership fee.   However,

petitioner has not shown that one of the acts for which the

annual membership fee was paid--the issuance of a card--occurred
                               - 20 -


after payment of the fee.   On the contrary, the required act--the

issuance of a card--probably always or almost always occurred

before payment of the annual membership fee.   An example may help

to illustrate this point.   Assume petitioner issues a new card on

March 1 and bills for the annual membership fee on October 1.

In that situation, issuance of the card precedes payment of the

annual membership fee.   Thus, when the fee is paid, petitioner

has already performed one of the acts required by the cardholder

agreement, lending no support to reporting the income after the

petitioner receives the fee.   The same point would apply if the

card were issued for more than 1 year, as was petitioner’s

general practice for MasterCards.

     Now assume petitioner does not issue a card to a new

customer until after the customer pays the annual membership fee.

In that case, assuming that issuance of a card is a service under

Rev. Proc. 71-21, supra, petitioner might not be required to

report the fee income until it issues the card because it is an

act required by the cardholder agreement.   This latter example

has no bearing on this case, however, because petitioner did not

show (or try to show) that it delayed initial issuance of a

credit card until after it received annual membership fees from

any customers.

     Petitioner argues that, under section 3.06(b) of Rev. Proc.

71-21, supra, it may treat the annual membership fee as earned

ratably over the membership year because it was “not unreasonable
                                - 21 -


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”.      Sec. 3.06(b) of Rev. Proc.

71-21, supra at 549.    Petitioner argues that most of the services

it provides are contingent on whether a cardholder uses a card.

     We disagree that petitioner qualifies under section 3.06(b)

of Rev. Proc. 71-21, supra.     That section applies if a taxpayer

receives an advance payment pursuant to an agreement which

requires the taxpayer to perform contingent services on a

continuing basis in order to earn the payment.      Sec. 3.06, Rev.

Proc. 71-21, supra.     The cardholder agreement does not require

petitioner to perform contingent services of that kind.      It

requires petitioner to issue a card and establish a credit limit.

Once petitioner does those things, petitioner may close an

account at any time.

     Petitioner cites Cozine & Showfety, “Advance Payments for

Goods and Services”, 2 Tax Adviser 602 (1971); and Sobeloff, “New

Prepaid Income Rules:    IRS Reversal of Position Will Aid Many

Taxpayers”, 33 J. Taxn. 194 (1970).      These articles are useful

discussions of Rev. Proc. 70-21, 1970-2 C.B. 501, and Rev. Proc.

71-21, supra, but they do not give any reason for us to agree

with petitioner on the issue in dispute here.

     Petitioner points out that respondent has ruled that the

merchant discount earned by a bank operating a credit card plan

is service income which a cash basis bank should include in
                               - 22 -


income as payments when received from cardholders on their

accounts, Rev. Rul. 78-40, 1978-1 C.B. 136, and which an accrual

method bank should include in income as it makes remittances to

the merchants.   Rev. Rul. 71-365, 1971-2 C.B. 219.     Those rulings

are entirely consistent with our holding here because they

require cash basis banks to report income when received and

accrual basis banks to report income under the all events test.

3.   Relationship to Regulatory and Financial Accounting

     Petitioner reported annual membership fees ratably over 12-

month membership years for financial accounting, shareholder

reporting, and regulatory reporting purposes from 1981 through

the years in issue.    Petitioner contends that this treatment is

authorized for banks that charge periodic fees to credit card

holders by an audit guide prepared by the Banking Committee of

the American Institute of Certified Public Accountants and by

Instructions to the Consolidated Reports of Condition and Income

(Call Reports) issued in 1983 by the Federal Financial

Institutions Examination Council for use by the three Federal

banking agencies, the Board of Governors of the Federal Reserve

System, the Federal Deposit Insurance Corporation, and the Office

of the Comptroller of the Currency.      Petitioner argues that its

reporting for those purposes supports its identical reporting for

income tax purposes.   We disagree.     Petitioner’s deferral of

cardholder income for financial accounting, regulatory, or other

purposes does not determine the proper Federal income tax
                               - 23 -


treatment.   Thor Power Tool Co. v. Commissioner, 439 U.S. 522,

540-541 (1979).    Although generally accepted accounting practices

may generally be used for tax accounting purposes, the taxpayer’s

use of a method of accounting is “expressly limited to cases

where the Commissioner believes that the accounts clearly reflect

the net income.”    Lucas v. American Code Co., 280 U.S. 445, 449

(1930); see American Auto. Association v. United States, 367 U.S.

687, 693 (1961).   A transaction need not be characterized the

same for financial accounting purposes and for tax purposes.

Frank Lyon Co. v. United States, 435 U.S. 561, 577 (1978).

     To reflect concessions,


                                             Decision will be entered

                                        under Rule 155.
