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annual fees in their books ratably over 12 months. When the
annual fee was assessed, the issuing banks established a credit
card receivable and made an offsetting credit entry to the
deferred income account corresponding to the calendar month of
the assessment. They then recognized the annual fees as income
ratably over the ensuing 12-month period.8
For financial accounting purposes and bank regulatory
accounting purposes, for the year 1980 and all years thereafter,
petitioner ratably allocated its annual fees over 12 months. For
Federal income tax purposes, for the taxable years 1980 through
1985, petitioner ratably allocated the annual fees over 12
months. Petitioner has maintained adequate books and records of
the annual fees so that the amount deferred on its Federal income
tax return for each of the taxable years 1980 and 1981 can be
verified from such books and records.
Respondent determined that the annual fees assessed in
taxable years 1980 and 1981 should be included in income in the
year of receipt for Federal income tax purposes, and increased
petitioner's income by $2,962,829 and $1,010,872, for 1980 and
1981, respectively. In addition, respondent adjusted
petitioner's income for the taxable years 1976 through 1982 in
accordance with a Schedule of Agreed Adjustments executed by
petitioner on April 12, 1993. Respondent allowed petitioner a
8 In Stipulation 16 the parties have set out the details of
this accounting system.
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