                    FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

WESTPAC PACIFIC FOOD; SAVE                
MART SUPERMARKETS, INC., TAX
MATTERS PARTNER,                                  No. 02-71041
           Petitioners-Appellants,
               v.                                 Tax Ct. No.
                                                    12400-99
COMMISSIONER OF INTERNAL                            OPINION
REVENUE,
             Respondent-Appellee.
                                          
                 Appeal from a Decision of the
                   United States Tax Court

                  Argued and Submitted
       September 15, 2004—San Francisco, California

                       Filed June 21, 2006

     Before: James L. Oakes,* Andrew J. Kleinfeld, and
           Consuelo M. Callahan, Circuit Judges.

                   Opinion by Judge Kleinfeld




  *The Honorable James L. Oakes, Senior Circuit Judge of the United
States Court of Appeals for the Second Circuit, sitting by designation.

                                6885
6888               WESTPAC PACIFIC FOOD v. CIR


                             COUNSEL

Thomas F. Carlucci, Foley & Lardner, LLP, San Francisco,
California, for the appellants.

Audrea R. Tebbets, Department of Justice, Tax Division,
Washington, D.C., for the appellee.


                              OPINION

KLEINFELD, Circuit Judge:

   We must decide whether cash paid in advance by a whole-
saler to a retailer, in exchange for a volume commitment, is
“gross income” under 26 U.S.C. § 61. In the grocery trade,
these are called “advance trade discounts.”

   It is hard to think of a way to make money by buying
things. A child may think buying things is how one makes
money: he sees his father give a clerk a single piece of paper
money, and receive in exchange the goods purchased, several
pieces of paper money, and a number of coins. And a person
may jokingly say to a spouse “I made $100 today” after buy-
ing something on sale for $100 off. But everyone knows these
are merely amusing remarks, not real ways to make money.1




  1
    About the only obvious way to make money by buying things is to buy
back one’s own debt at a discounted rate, as when a corporation purchases
its outstanding bonds at less than par. See United States v. Kirby Lumber
Co., 284 U.S. 1, 2 (1931).
                    WESTPAC PACIFIC FOOD v. CIR                      6889
   The facts outlined below sound more complicated than they
are, so imagine a simple hypothetical. Harry Homeowner goes
to the furniture store, spots just the right dining room chairs
for $500 each, and says “I’ll take four, if you give me a dis-
count.” Negotiating a 25% discount, he pays only $1,500 for
the chairs. He has not made $500, he has spent $1,500. Now
suppose Harry Homeowner is short on cash, and negotiates a
deal where the furniture store gives him a 20% discount as a
cash advance instead of the 25% off. This means the store
gives him $400 “cash back” today, and he pays $2,000 for the
four chairs when they are delivered shortly after the first of
the year. Harry cannot go home and say “I made $400 today”
unless he plans to skip out on his obligation to pay for the
four chairs. Even though he receives the cash, he has not
made money by buying the chairs. He has to sell the chairs
for more than $1,600 if he wants to make money on them.
The reason why the $400 “cash back” is not income is that,
like a loan, the money is encumbered with a repayment obli-
gation to the furniture store and the “cash back” must be
repaid if Harry does not perform his obligation.

   This case is that simple, except that it involves a little more
math and a lot more money. The taxpayer promised to buy a
lot of items and received cash in advance as its discount on
its future, high-volume purchases. Using accrual accounting,
the taxpayer treated the up front cash discount as a liability
when it was received, just like a loan. As goods were sold, the
taxpayer applied the discount pro rata to the full purchase
price it paid.2 The net effect was that Westpac reduced its cost
  2
    The government argues that there is no evidence that Westpac was
actually purchasing the goods at the full list price. We give this argument
very little credence. The Tax Court — and each party to the various con-
tracts — consistently treated the advance “payments” as discounts on the
volume Westpac agreed to purchase. Further, Westpac actually repaid the
pro rata portion of the advance discount on the contracts for which it did
not meet the volume requirement. In short, nothing in the record supports
the government’s argument that the up front money was a payment for
entering into the contracts or anything other than an advance discount.
6890              WESTPAC PACIFIC FOOD v. CIR
of goods sold and increased its reported profit (and thus its
taxable income). The taxpayer reported pro rata amounts
without matching sales as miscellaneous or other income.

   The government concedes, and the Tax Court agreed, that
Westpac’s method was consistent with generally accepted
accounting principles. “Revenue is usually recognized when
the earning process is complete and an exchange has taken
place.”3 Nevertheless, the Tax Court concluded that the cash
discount received in advance was income, noting that tax
principles do not serve the same purposes as accounting prin-
ciples, such as reflecting to shareholders how their company
is performing.

   A company would indeed have a major problem if it
accounted to its shareholders as the Tax Court would have it
account to the government. Were a company to get very sig-
nificant amounts of up front cash discounts on its obligation
to purchase goods in the future and tell stockholders and pro-
spective stock purchasers that it had “made” this much “in-
come,” investors would be sorely disappointed to learn that all
the money had to be paid back if their company did not sell
all the goods it had promised to sell in the future. The com-
pany would be like Harry Homeowner claiming to have
“made” $400 when he received his cash advance discount on
the four chairs. Harry might have to spend the night on the
couch, but the CEO could spend the night in jail.4

                            FACTS

  Three grocery store chains — Raley’s, Save Mart, and Bel
Air — organized the taxpayer, Westpac, as a partnership to
purchase and warehouse inventory. Westpac is an accrual
basis taxpayer.
  3
   Martin A. Miller, Comprehensive GAAP Guide 1990 § 36.51 (1989).
  4
   See, e.g., 15 U.S.C. § 78j(b).
                WESTPAC PACIFIC FOOD v. CIR               6891
   During 1990 and 1991, Westpac made four contracts to buy
inventory and receive cash in advance: (1) lightbulbs from
GTE Sylvania; (2) Hallmark cards from Ambassador; (3)
bows, wrapping paper, and other products from American
Greetings; and (4) spices from McCormick. Under each con-
tract, Westpac promised to buy a minimum quantity of mer-
chandise and received a volume discount in the form of cash
up front. If Westpac bought too few lightbulbs, spices, greet-
ing cards, etc., then it was obligated to pay back the cash
advance pro rata. Conversely, Westpac’s obligation to repay
the cash advance was extinguished if Westpac purchased the
required volume. Westpac made other promises as well, such
as exclusivity and shelf space, but the volume purchased
determined whether it had to refund the cash advance and, if
so, how much it had to refund.

GTE Sylvania Contract

   In July of 1990, Westpac made a deal with the Sylvania
Lighting division of GTE Products Corp. to (1) make GTE
Sylvania its exclusive lightbulb supplier for Westpac and its
member stores for four years; (2) “aggressively and regularly”
advertise and promote GTE Sylvania’s products; (3) dedicate
on average at least 12 lineal feet of shelf space to GTE Syl-
vania’s products in its member stores; and (4) purchase $17
million in lightbulbs during the term of the agreement. Given
Westpac’s volume purchase commitment, GTE Sylvania
agreed to pay Westpac $1.1 million as an “unearned advance
allowance.” GTE Sylvania paid this to Westpac by check, and
agreed to pay Westpac another $200,000 on the first, second,
and third anniversaries of the agreement, provided that GTE
Sylvania was satisfied with Westpac’s warehouse distribution
arrangement. The contract refers to the total $1.7 million in
payments as the “Westpac Allowance” and contains the fol-
lowing clause:

    Upon termination of this Agreement, Westpac will
    reimburse GTE Sylvania on a pro-rated basis for any
6892            WESTPAC PACIFIC FOOD v. CIR
    portion of the Westpac Allowance advanced to
    Westpac but not earned due to the failure by West-
    pac to purchase at least $17.0 million in lamps.

During Westpac’s 1991 tax year, GTE Sylvania paid the first
$200,000 to Westpac.

   Westpac could not resell enough lightbulbs to meet the
minimum volume the contract called for, so it terminated the
arrangement in October of 1994. Westpac’s termination letter
acknowledged its obligation to pay back a pro-rated portion
of the Westpac Allowance, and it repaid $861,857 to GTE
Sylvania in December.

Ambassador Contract

   In August of 1990, Westpac agreed to buy more than $61
million worth of greeting cards and like items from Ambassa-
dor, and Ambassador agreed to pay Westpac $4,572,000 up
front as a volume discount. The contract provided for pro rata
reimbursement of the cash advance if Westpac did not meet
its volume commitment. The parties agreed on an addendum
in 1994, increasing Westpac’s volume commitment and obli-
gating Ambassador to additional cash advances.

  In 1997, Westpac and Ambassador discussed termination
because of Westpac’s inadequate purchasing volume, and
Ambassador sent Westpac a letter stating how much of the
cash advance Westpac would be required to repay upon termi-
nation. This letter included a table listing (1) the amount of
advances Westpac had received under the contract; (2) the
volume of purchases Westpac had achieved through Decem-
ber of 1996; and (3) the pro rata repayment amount for the
advances, which corresponded to the percentage of the vol-
ume Westpac had promised to purchase. The parties ulti-
mately decided against terminating the contract.
                 WESTPAC PACIFIC FOOD v. CIR               6893
American Greetings Contract

  In January of 1991, Westpac’s assignor, Save Mart, and
American Greetings agreed that American Greetings would
supply counter cards, tray packs, wraps, bows, and similar
products. The company would give American Greetings the
exclusive right to supply these goods, a designated amount of
shelf space, and would continue the arrangement until it had
spent $17,970,000 on American Greetings products. Ameri-
can Greetings initially agreed to provide credits and dis-
counts, but the agreement was later changed to $1,250,000
cash up front “in lieu of periodic volume discounts.”

   On this deal, too, the volume requirement was not met and
the contract was terminated by mutual consent. Although the
contract did not have an explicit provision for pro rata reim-
bursement of the up front, cash payment, both parties recog-
nized the repayment obligation, evidently because of the
customs of the grocery trade. American Greetings calculated
Westpac’s pro rata repayment obligation at $406,243, and
Westpac paid it. The check stub read “repayment of contract
adv[ance].”

McCormick Contract

   In March of 1991, Westpac and McCormick & Co. agreed
that McCormick would supply spices, extracts, seasonings,
and such, and Westpac would buy at least $50 million worth.
McCormick provided Westpac $1 million in product without
charge and $5 million cash up front, with additional cash pay-
ments to be made as Westpac met periodic volume goals. The
contract obligated Westpac “to repay any unearned prepaid
allowances on a pro rata basis” in the event Westpac failed
to satisfy the entire $50 million volume purchase commit-
ment. Nothing in the record reflects that this contract was ever
terminated or that Westpac made any pro rata repayments.
6894               WESTPAC PACIFIC FOOD v. CIR
Westpac’s Tax Reporting

   In accord with standard accounting principles, Westpac
accounted for the up front cash as a liability at the time it
received the cash.5 The cash advance got translated into tax-
able income through Westpac’s inventory accounting. As
Westpac purchased the goods for which it had the volume
obligations, it subtracted pro rata portions of the advance
cash discounts from what it paid. This had the effect of reduc-
ing the cost of goods sold (and increasing the taxable profits
from sales) by the amount of the cash advances attributable to
the goods sold.

  The government took the position that Westpac and Save
Mart under-reported over $5.5 million in gross income for
1990 and over $4.9 million for 1991 because they did not
report the cash advances as gross income. Westpac filed a
petition for readjustment and the government opposed it.
Relying on Commissioner of Internal Revenue v. Glenshaw
Glass Co.,6 the Tax Court held that the cash advance dis-
counts were “income” under section 61 of the Internal Reve-
nue Code.7 Westpac timely filed this appeal.

  The sole issue before us is whether advance trade discounts
constitute gross income when received. We hold that they do
not and reverse the Tax Court.

                             ANALYSIS

  There are no disputed findings of fact in this case, just the
question of law: whether “advance trade discounts” subject to
  5
     See Charles T. Horngren & Walter T. Harrison, Accounting 1134
(1989) (“Unearned revenues are liabilities because the business that
receives the cash owes the other party goods or services to be delivered
later.”).
   6
     CIR v. Glenshaw Glass Co., 348 U.S. 426 (1955).
   7
     26 U.S.C. § 61.
                     WESTPAC PACIFIC FOOD v. CIR            6895
repayment if volume requirements are not met are income
when received. We review the Tax Court’s decision on ques-
tions of law de novo.8

A.     Waiver

   [1] The government argues that Westpac waived the argu-
ment that the advances were not income because that is not
the argument Westpac made to the Tax Court. We have exam-
ined Westpac’s trial brief to the Tax Court and cannot agree.
Westpac stated the issue as whether “the advance trade dis-
counts received by Petitioner [should] be recognized as
income for federal income tax purposes” in the year received,
or, as the government claimed, “as the associated inventory
was sold.” The government argues that Westpac’s argument
to the Tax Court focused on when the cash was income rather
than whether, but that is too fine a distinction. Westpac has
never denied that its income tax should be higher to reflect the
cash received in advance. Rather, Westpac maintains that the
advance trade discounts are not income when received but
adjustments to the cost of goods sold. Either way, the central
question is when Westpac has to recognize the income for tax
purposes, so Westpac’s argument on appeal was sufficiently
preserved.

B.     Is A Discount in the Form of A Cash Advance Income
       When Received?

   [2] There appears to be no circuit court authority on point,
but the Supreme Court authorities bracketing the question
compel our answer: Cash advances in exchange for volume
purchase commitments, subject to pro rata repayment if the
volume commitments are not met, are not income when
received.
  8
     Milenbach v. CIR, 318 F.3d 924, 930 (9th Cir. 2003).
6896                WESTPAC PACIFIC FOOD v. CIR
   [3] The statutory definition of gross income is expansive.9
Commissioner v. Glenshaw Glass Co. held that punitive dam-
ages received by a successful litigant were “income” because
they were “accessions to wealth, clearly realized, and over
which the taxpayers have complete dominion.”10 The govern-
ment argues that the cash advances in this case fit that defini-
tion because Westpac had “complete dominion” over the
money. It did not have to put the cash in a trust account and
could spend the money as it chose. But that leaves out sine
qua non of income: that it be an “accession to wealth.” One
may have “complete dominion” over money but it does not
become income until it is an “accession to wealth.” That is
why borrowed money is not income, even though the bor-
rower has “complete dominion” over the cash.11 “Because of
this [repayment] obligation, the loan proceeds do not qualify
as income to the taxpayer.”12

   The Supreme Court decisions bracketing this case are CIR
v. Indianapolis Power & Light Co.13 on one side, and Automo-
bile Club of Michigan v. CIR14 and Schlude v. CIR15 on the
other.

   [4] Indianapolis Power held that utility customers’s secur-
ity deposits are not income to the utility because of the obliga-
tion to repay the money when service ended.16 The decision
  9
    26 U.S.C.A. § 61(a).
  10
      See Glenshaw Glass, 348 U.S. at 431.
   11
      See CIR v. Indianapolis Power & Light Co., 493 U.S. 203, 207 (1990)
(Explaining that “it is well settled that receipt of a loan is not income to
the borrower.”).
   12
      CIR v. Tufts, 461 U.S. 300, 307 (1983).
   13
      CIR v. Indianapolis Power & Light Co., 493 U.S. 203 (1990).
   14
      Automobile Club of Michigan v. CIR, 353 U.S. 180 (1957).
   15
      Schlude v. CIR, 372 U.S. 128 (1963).
   16
      Indianapolis Power, 439 U.S. at 211-12.
                  WESTPAC PACIFIC FOOD v. CIR               6897
analogizes the security deposits to loans because of the repay-
ment obligation.17

   [5] Automobile Club of Michigan holds that prepaid mem-
bership dues are income when received, despite the associa-
tion’s obligation to provide membership services — maps,
tire repair and the like — during the subsequent year.18 The
reason was that pro rata application of the dues to each month
“bears no relation to the services” the club had to perform.19
Drivers do not call AAA once a month to repair a flat or send
a map, and AAA is entitled to keep the membership dues
regardless of whether the member ever requests any goods or
services. Schlude held that cash paid to a dance studio for
ballroom dancing lessons was income when received, not
when the lessons were provided.20 The Court applied Automo-
bile Club of Michigan, because the money was not refundable
and the studio could keep it even if the student did not show
up for dance lessons.21

   [6] This case is like Indianapolis Power, not Automobile
Club of Michigan or Schlude. The cash advance trade dis-
counts are like the security deposits in that they are subject to
repayment, and unlike the membership dues in that the recipi-
ent cannot keep the money regardless of what happens after
receipt. Westpac could only retain the full, up front trade dis-
count if it met the volume requirements. Like the security
deposit, the cash advance is subject to repayment. The only
difference is that the repayment amount in this case may not
be the full amount advanced by the vendor, but that is because
the repayment amount is reduced pro rata to the extent West-
pac fails to fulfill its volume commitment.
  17
     See id. at 208.
  18
     Automobile Club of Michigan, 353 U.S. at 712-13.
  19
     Id. at 712.
  20
     Schlude, 372 U.S. at 137.
  21
     See id. at 130.
6898                 WESTPAC PACIFIC FOOD v. CIR
   [7] Because the taxpayer here has to pay the money back
if the volume commitments are not met, it is not an “accession
to wealth” as required by Glenshaw Glass. Westpac either has
to buy a specified volume of goods for more than it would
otherwise pay or pay back the money, just like Harry Home-
owner. Thus the cash advance discounts are, like a loan or
customer security deposit, liabilities rather than income when
received.

   The Tax Court found that Westpac’s accounting for the
cash advances as affecting cost of goods sold complied with
generally accepted accounting principles, but correctly held
that accounting rules are not necessarily controlling for tax pur-
poses.22 The regulations require that inventory accounting
conform to best accounting practices and clearly reflect
income.23 But that does not go far enough to transform the
cash into “income” in the face of Indianapolis Power. We
cannot agree with the government that Westpac’s “unfettered
use” of the money makes it income, because it was not an
accession to wealth. Rather, it was merely an advance against
an obligation, repayable if the obligation was not performed.

  [8] Our decision in Milenbach24 is more analogous to this
case than Schlude or Automobile Club of Michigan. In Milen-
  22
      See American Automobile Ass’n v. United States, 367 U.S. 687, 693
(1961) (“[t]o say that in performing the function of business accounting
the method employed by the Association ‘is in accord with generally
accepted commercial accounting principles and practices’ . . . is not to
hold that for income tax purposes it so clearly reflects income as to be
binding on the Treasury.”).
   23
      See 26 C.F.R. § 1.471-2(a):
       (a) Section 471 provides two tests to which each inventory
       must conform:
          (1) It must conform as nearly as may be to the best
          accounting practice in the trade or business, and
        (2) It must clearly reflect the income.
  24
    Milenbach v. CIR, 318 F.3d 924 (9th Cir. 2003).
                      WESTPAC PACIFIC FOOD v. CIR            6899
bach, a Los Angeles entity loaned the Oakland Raiders $6.7
million, repayable only out of revenue from the luxury suites
to be built in the future, to induce the team to move to Los Ange-
les.25 Even though it was a non-recourse loan with no certain
repayment date, and even though the Raiders neither built the
suites nor made any payments, we held that the $6.7 million
was not income because the repayment obligation was genu-
ine.26 The case at bar is easier than Milenbach because the
cash advances here are more plainly subject to repayment in
calculable amounts by a set date. Westpac not only had a duty
to repay the discounts, it actually did repay them when it did
not meet the volume commitments. When Westpac did buy
the required volume of goods, it paid list price rather than a
discounted price, and realized the income for tax purposes.

   [9] It works out about the same as with Harry Homeowner:
He has to sell the chairs for more than he paid in order to
make money on them. Westpac had to sell the lightbulbs, rib-
bons, greeting cards, and such for more than they paid in
order to make money on them. It remains exceedingly diffi-
cult to make money merely by buying things. Westpac did not
get any richer when it received its volume discount in the
form of cash up front than Harry Homeowner did when he got
the $400 from the furniture store. There was no accession to
wealth when Westpac got the cash, just an increase in cash
assets offset by an equal liability for the advance trade dis-
counts.

  REVERSED.




  25
    See id. at 929.
  26
    See id. at 931.
