                       T.C. Memo. 2011-100



                      UNITED STATES TAX COURT



LATTICE SEMICONDUCTOR CORPORATION AND SUBSIDIARIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13109-08.             Filed May 9, 2011.



     Steven Marc Wilker, Mark F. LeRoux, and Michael J.

Millender, for petitioner.

     John D. Davis, for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   Respondent determined deficiencies in

petitioner’s tax for its taxable years ending April 3, 1999 and

December 30, 2000 (the years at issue) of $338,989 and $254,240,

respectively, resulting from disallowance of a consolidated net

operating loss (CNOL) carryback from 2002.   There are two issues
                                - 2 -

to decide.   The first issue is whether respondent erred in

denying petitioner’s request to change its accounting method with

respect to 12-month expenses for 2002.     We hold that he did not.

The second issue is whether petitioner may claim a prepaid

expense deduction for 2002.    We hold that it may not.

                              Background

     This case was submitted fully stipulated under Rule 122.1

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Petitioner was an accrual method

taxpayer with its principal place of business in Hillsboro,

Oregon at the time it filed the petition.

     Petitioner designs, develops and markets high-performance

programmable logic devices and related software.    Petitioner

traditionally incurred regular expenses from prepaid insurance,

maintenance and service contracts (contracts).    These contract

expenses were prepaid expenses under section 263 and the

regulations promulgated thereunder as of 2002.    The benefits of

these contracts typically did not exceed 12 months, but the

contract periods sometimes spanned two tax years.    Before 2002

petitioner capitalized its prepaid expenses for contracts that

extended substantially into the following year.


     1
      All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code (Code) in effect for 2002, unless otherwise
indicated.
                               - 3 -

     The Treasury Department issued an Advance Notice of Proposed

Rulemaking (ANPRM) in January 2002 stating that it expected to

propose a rule that would no longer require capitalization of 12-

month prepaid expenses under section 263.   ANPRM, 67 Fed. Reg.

3461 (Jan. 24, 2002).   The next month, respondent issued an

Industry Directive on Guidelines for the Application of Advance

Notice of Rulemaking for Intangibles Under IRC 263(a) (Industry

Directive) (Feb. 26, 2002).   The Industry Directive stated the

ANPRM’s 12-month rule would likely be adopted despite the

Internal Revenue Service’s (IRS) contrary position at the time.

The Industry Directive further cautioned that prior IRS consent

was still required for accounting method changes.

     The Treasury Department published a Notice of Proposed

Rulemaking (NPR) regarding 12-month prepaid expenses in December

2002.   Sec. 1.263(a)–4(f)(1), Proposed Income Tax Regs., 67 Fed.

Reg. 77719 (Dec. 19, 2002).   The NPR again proposed to

incorporate a 12-month rule where an expenditure could be

deducted in the year incurred so long as the useful life of the

resultant benefit did not extend beyond a year.     Id.   The NPR

advised taxpayers not to seek an accounting method change in

reliance upon the proposed rules until final regulations were

published.   Sec. 1.263(a)–4(o), Proposed Income Tax Regs., 67

Fed. Reg. 77723 (Dec. 19, 2002).
                                - 4 -

     Nine days later, petitioner applied for an accounting method

change under Rev. Proc. 97-27, 1997-1 C.B. 680, to deduct 12-

month prepaid expenses spanning two taxable years (relevant

expenses).   Petitioner relied on the ANPRM and U.S. Freightways

Corp. v. Commissioner, 270 F.3d 1137 (7th Cir. 2001), revg. 113

T.C. 329 (1999).   Petitioner then claimed a deduction for the

relevant expenses for the first time when it filed its

consolidated Federal income tax return for 2002.2    Petitioner

calculated a CNOL carryback from the 2002 deduction of the

relevant expenses, which it carried back to 2000 and 1999.

Petitioner claimed a refund for those years based in part on the

relevant expense deduction.   Petitioner claimed this deduction

for the relevant expenses and the corresponding CNOL carrybacks

and refunds even though it had not yet received approval to

change its accounting method.

     The Treasury Department published final regulations in

January 2004 (approximately a year after petitioner’s request)

stating that a taxpayer is not required to capitalize 12-month

prepaid expenses (final regulations).   Sec. 1.263(a)–4(f), Income

Tax Regs.; T.D. 9107, 2004-1 C.B. 447, 451.   The final regulations

are effective for amounts paid or incurred on or after December

31, 2003 (years after the years at issue).    Sec. 1.263(a)–4(o),


     2
      As aforementioned, petitioner capitalized its prepaid
expenses for contracts that extended substantially into the
following year before 2002.
                                 - 5 -

Income Tax Regs.    Respondent subsequently released Rev. Proc.

2004-23, 2004-1 C.B. 785, providing procedures for automatic

consent to accounting method changes that complied with the final

regulations in principle.3    It specified, however, that requests

for accounting method changes pursuant to the final regulations

for a year earlier than the effective date (such as petitioner’s)

would not be granted.     Id. sec. 2.07, 2004-1 C.B. at 786.

     Respondent denied petitioner’s request to change its

accounting method in May 2004 and gave petitioner the option to

withdraw its application and receive a refund of the user fee.

Respondent invited petitioner to explain its reasons for not

withdrawing its request, if petitioner chose not to withdraw and

use the provisions of Rev. Proc. 2004-23, supra.     Petitioner

neither withdrew its application nor provided further explanation

to respondent.     Respondent issued a letter formally denying

petitioner’s accounting method change in June 2005.     Respondent

also issued to petitioner an explanation of items on Form 886-A,

to which petitioner submitted a response.     Petitioner’s response

included a discussion of Zaninovich v. Commissioner, 616 F.2d 429

(9th Cir. 1980), revg. 69 T.C. 605 (1978), to argue that Ninth

Circuit law allows Ninth Circuit taxpayers to use the 12-month

rule.



        3
      These procedures differ from the discretionary consent
procedures under Rev. Proc. 97-27, 1997-1 C.B. 680.
                                 - 6 -

     Respondent issued petitioner the deficiency notice

disallowing the relevant expense deduction and the corresponding

CNOL carrybacks, resulting in the deficiencies at issue.

Petitioner timely filed a petition.

                             Discussion

     This case relates to a taxpayer’s change in its accounting

method without first obtaining consent from the Commissioner.

Respondent denied petitioner’s request to change its accounting

method to the 12-month rule.    Petitioner argues that respondent

implemented an automatic rejection policy and automatically

disregarded developing caselaw.    Respondent contends that he

acted within his proper discretion.

     We begin by reviewing the procedural requirements and

caselaw governing a change of accounting method.     A taxpayer must

secure IRS consent before changing its accounting method for

computing income.    Sec. 446(e); sec. 1.446-1(e)(2)(i), Income Tax

Regs.    The prior consent requirement promotes consistent

accounting practices and therefore secures uniform collection of

taxes.    See FPL Group, Inc. & Subs. v. Commissioner, 115 T.C.

554, 574 (2000) (quoting Barber v. Commissioner, 64 T.C. 314,

319-320 (1975)).    Taxpayers are prevented from unilaterally

switching to more financially beneficial methods of accounting

with the benefit of hindsight.    See sec. 446(e).   Disallowing

such unilateral change helps to protect against the loss of
                                - 7 -

revenues and prevents administrative burdens and inconvenience in

administering the tax laws.    See Diebold, Inc. v. United States,

16 Cl. Ct. 193, 208 (1989), affd. 891 F.2d 1579 (Fed. Cir. 1989).

Accordingly, it is of great importance to the Commissioner that

taxpayers properly request and receive permission to change

accounting method before implementing a change.

     The taxpayer must continue computing taxable income under

its old accounting method if the Commissioner denies the

taxpayer’s request to change its accounting method.   See, e.g.,

United States v. Ekberg, 291 F.2d 913, 925 (8th Cir. 1961);

Advertisers Exch., Inc. v. Commissioner, 25 T.C. 1086, 1092-1093

(1956), affd. 240 F.2d 958 (2d Cir. 1957).   In addition, the

Commissioner can require a taxpayer to abandon the new accounting

method and to report taxable income using the old method if the

taxpayer changes its accounting method without first obtaining

consent.   See, e.g., Advertisers Exch., Inc. v. Commissioner,

supra at 1093; Sunoco, Inc. & Subs. v. Commissioner, T.C. Memo.

2004-29.

     The Commissioner has wide discretion to grant or deny

consent to a change in accounting method.    See, e.g., Capitol

Fed. Sav. & Loan Ass’n & Sub. v. Commissioner, 96 T.C. 204, 213

(1991).    The Commissioner’s refusal to consent to a taxpayer’s

requested change in accounting method is reviewed under an abuse
                                 - 8 -

of discretion standard.    See id. at 213; S. Pac. Transp. Co. v.

Commissioner, 75 T.C. 497, 681-682 (1980).

     With this background, we now consider petitioner’s

arguments.   Petitioner argues that respondent ignored developing

caselaw and applied an automatic rejection policy under Rev.

Proc. 2004-23, supra.     Respondent argues that petitioner was

ineligible to deduct the relevant expenses before the regulations

became final.   We agree with respondent.

     Petitioner applied to change its accounting method to

deduct, rather than capitalize, the relevant expenses.

Petitioner originally cited the ANPRM4 and U.S. Freightways Corp.

v. Commissioner, 270 F.3d 1137 (7th Cir. 2001), to support its

position, highlighting recent developments favoring its

accounting method change request.    Petitioner later relied upon a

Ninth Circuit Court of Appeals case that had earlier reversed the

Tax Court.   Zaninovich v. Commissioner, supra.    We disagree with

petitioner that the Ninth Circuit allowed accrual basis

taxpayers, such as petitioner, to use the 12-month rule.

     We acknowledge that the Ninth Circuit Court of Appeals

reversed our decision in Zaninovich and held that 12-month rental

payments by a cash method taxpayer were fully deductible in the


     4
      The ANPRM did not purport to change existing administrative
positions and did not negate the authorities under the then-
existing law. See Blasius v. Commissioner, T.C. Memo. 2005-214.
As such, it provided no support for petitioner’s request to
change its accounting method.
                                - 9 -

year of payment.   In doing so, it specifically distinguished

between an accrual basis taxpayer (such as petitioner) and a cash

basis taxpayer (such as the one in Zaninovich).    Id. at 431 n.5.

Zaninovich applies only to cash basis taxpayers.    Zaninovich did

not indicate that the Ninth Circuit would follow a 12-month rule

for accrual basis taxpayers.

     Approximately two decades later, the Seventh Circuit Court

of Appeals reversed the Tax Court in adopting the 12-month rule

for accrual method taxpayers.   See U.S. Freightways Corp. v.

Commissioner, supra.   This holding, however, is not binding on

respondent, the Tax Court or taxpayers outside the Seventh

Circuit.

     Petitioner further asks us to find that Zaninovich and U.S.

Freightways indicate that the Court of Appeals for the Ninth

Circuit would have adopted a 12-month rule for accrual method

taxpayers even without enactment of the final regulations.

Petitioner also argues that respondent imposed his interpretation

of the Code to disregard developing caselaw.   We disagree.   We

decline petitioner’s invitation to speculate about whether the

Court of Appeals for the Ninth Circuit would have followed U.S.

Freightways if it had petitioner’s case.   Indeed, U.S.

Freightways was inconsistent with our decision and the decisions

of other Courts of Appeals at the time.    See Blasius v.

Commissioner, T.C. Memo. 2005-214 (finding substantial
                              - 10 -

justification for the Commissioner’s attempt to capitalize

professional fees, despite appellate reversal in U.S.

Freightways).   Accordingly, we find that respondent did not abuse

his discretion in rejecting petitioner’s accounting method change

after Zaninovich and U.S. Freightways.

     Petitioner also asks us to find that respondent’s rejection

of petitioner’s accounting method change request was arbitrary

and capricious because respondent instituted an automatic

rejection policy.   Petitioner asserts that respondent rejected

all accounting method change requests aiming to benefit from the

12-month rule if such requests did not comply with the procedures

under Rev. Proc. 2004-23, supra.   Accordingly, petitioner argues

that respondent’s automatic rejection policy meant respondent

failed to evaluate petitioner’s accounting method change request

under traditional application procedures and developing caselaw.

     We need not reach this question, however, of whether

respondent implemented an automatic rejection policy.   We have

already found that respondent acted within his discretion in

rejecting petitioner’s accounting method change request under

then-existing caselaw as applied to petitioner’s circumstances.

We need not speculate as to whether the Commissioner would have

reached a different conclusion if considering a similarly-
                                  - 11 -

situated taxpayer in a circuit where the caselaw supported a

different conclusion.5

     Accordingly, petitioner’s only option to change its

accounting method to benefit from the 12-month rule was to rely

upon the final regulations and their implementation as described

in Rev. Proc. 2004-23, supra.       The final regulations are

effective for amounts paid or incurred on or after December 31,

2003.       Petitioner had sought to deduct relevant expenses for

2002, a year before the effective date of the final regulations.

Respondent was justified in enforcing the effective date

provisions implementing the final regulations.       See sec. 7805(a).

     We hold that respondent did not abuse his discretion in

denying petitioner’s request to change its accounting method.

Respondent acted within his discretion to assert section 446(e)

and require petitioner to abandon the new method and to report

taxable income using the old accounting method.       See, e.g.,

Advertisers Exch., Inc. v. Commissioner, 25 T.C. at 1093; Sunoco,




        5
      Petitioner also argues that respondent’s denial of its
request resulted in unequal treatment of similarly-situated
taxpayers. We again disagree. Denying petitioner’s accounting
method change application was consistent with respondent’s
previous pronouncements, including his positions in Zaninovich
and U.S. Freightways. Denial of petitioner’s application under
the final regulations was consistent with the effective date and
transitional provisions announced in Rev. Proc. 2004-23, 2004-1
C.B. 785, which applied equally to all taxpayers relying on the
final regulations.
                             - 12 -

Inc. & Subs. v. Commissioner, T.C. Memo. 2004-29.    Accordingly,

we sustain respondent’s determination to disallow the expenses.

     We have considered all remaining arguments the parties made

and, to the extent not addressed, we conclude they are

irrelevant, moot or meritless.

     To reflect the foregoing,


                                        Decision will be entered

                                   for respondent.
