Anderson v. United States Sec'y of Agriculture

SLIP OP. 06-161
UNITED STATES COURT OF INTERNATIONAL TRADE

------------------------------x
ROBERT L. ANDERSON, :
:
Plaintiff, :
: Before: Pogue, Judge
v. : Court No. 05-00329
:
:
UNITED STATES SEC’Y :
OF AGRICULTURE, :
:
Defendant. :
------------------------------x

[Remanded for reconsideration of refusal to consider Plaintiff’s
claim that his net income declined on an accrual basis.]

Dated: November 1, 2006.

Robert L. Anderson, Plaintiff pro se.

Peter D. Keisler, Assistant Attorney General; David M. Cohen,
Director, Patricia M. McCarthy, Assistant Director, Commercial
Litigation Branch, Civil Division, U.S. Department of Justice
(David S. Silverbrand), for Defendant United States Secretary of
Agriculture.

OPINION

Pogue, Judge: Plaintiff Robert L. Anderson challenges the decision

of the Foreign Agricultural Service of the United States Department

of Agriculture (hereinafter “Agriculture” or the “USDA”) denying

his application for benefits under the trade adjustment for farmers
Court No. 05-00329 Page 2

program1 (“TAA program”). Plaintiff claims that Agriculture’s

decision improperly failed to recognize the actual accrual basis

decline in his net farm income for 2002. The court finds that the

USDA entirely failed to consider an important aspect of the problem

presented, see Motor Vehicle Mfs. Ass’n of U.S. v. State Farm Mut.

Auto Ins. Co., 463 U.S. 29, 43 (1983), and remands the

determination.

JURISDICTION AND STANDARD OF REVIEW

The court has jurisdiction under 19 U.S.C. § 2395.2 The court

must uphold the factual determinations of the USDA if they are

supported by substantial evidence. 19 U.S.C. § 2395(b). On legal

issues, the court considers whether the Secretary’s determination

is “in accordance with law.” Former Employees of Gateway Country

Stores LLC v. Chao, 30 CIT __,__, Slip Op. 06-32, at 9(March 3,

2006), Former Employees of Elec. Data Sys. Corp. v. United States

Sec'y of Labor, 28 CIT __, __, 350 F.Supp.2d 1282, 1286 (2004),

Former Employees of Rohm & Haas Co. v. Chao, 27 CIT __,__, 246

F.Supp.2d 1339, 1346 (2003).

1
See, Trade Adjustment Assistance Reform Act of 2002, Pub.
L. 107-210, Title 1, Subtitle C § 141, 116 Stat. 953(2002), 19
U.S.C. §§ 2401 et seq.
2
All references to 19 U.S.C. §§ 2395, 2401 et seq. are to
Supplement III of the 2000 edition of the United States Code
(2003). Otherwise references to the United States Code are to
the 2000 edition.
Court No. 05-00329 Page 3

BACKGROUND

A.

Under the TAA program, producers who have been certified as

eligible for benefits, see 19 U.S.C. § 2401a, must then

individually meet several conditions in order to receive such

benefits, 19 U.S.C. § 2401e. In particular, a producer qualifies

for assistance only if “the producer’s net farm income (as

determined by the Secretary [of Agriculture]”) for the most recent

year is less than the producer’s net farm income for the latest

year in which no adjustment assistance was received by the producer

under this chapter [19 U.S.C. §§ 2401 et seq.] ” 19 U.S.C. §

2401e(a)(1)(C)(emphasis added).3 Pursuant to this Statutory

Authority, and invoking the Internal Revenue Service (“IRS”) code,

the Secretary defined “net farm income” as “net farm profit or

loss, excluding payments under this part, reported to the Internal

Revenue Service for the tax year that most closely corresponds with

the marketing year under consideration.” 7 C.F.R. § 1580.1024

3
Though not relevant here, the agricultural commodity
producer’s adjusted gross income must also not exceed certain
levels specified in section 1308-3a of Title 7,
19 U.S.C. § 2401e(a)(2)(A)(i).
4
All references to the Code of Federal Regulations are to
the 2004 edition, except where otherwise indicated.
Court No. 05-00329 Page 4

(emphasis added)(also defining “net fishing income” the same way.).

B.

In October of 2003, the Foreign Agricultural Service of the

Department of Agriculture certified “[s]almon fishermen holding

permits and licenses in the states of Alaska and Washington” as

eligible to apply for trade adjustment assistance benefits. Trade

Adjustment Assistance for Farmers, 68 Fed. Reg. 62,766 (Dep’t

Agric. Nov. 6, 2003)(notice). Pursuant to this certification and

notification thereof, in January of 2004, Plaintiff applied for

benefits under the trade adjustment for farmers program pursuant to

19 U.S.C. § 2401e. The USDA denied Mr. Anderson’s application for

benefits on February 4, 2005, stating that the application was

denied because his “net fishing income did not decline from the

latest year in which no adjustment assistance was received (2001).”

Letter from Ronald Ford, Deputy Director, Program Division, to

Robert L. Anderson (Feb. 4, 2005) Administrative Record at 23.

Acting on the agency’s letter sent to him, and

7 C.F.R. § 1580.5055, Mr. Anderson appealed the USDA determination

5
This regulation reads: “[a]ny person aggrieved by a final
determination made with respect to an application for program
benefits under this part may appeal to the United States Court of
International Trade for a review of such determination, in
accordance with its rules and procedures.” 7 C.F.R. § 1580.505.
This provision was adopted in 2004, changing the appeals
procedure from the FSA administrative appeal procedure (the
National Appeals Division) to the Court of International Trade in
accordance with 19 U.S.C. § 2395. 7 C.F.R. Part 1580: Trade
Adjustment Assistance for Farmers, 69 Fed. Reg. 63,317, 63,317-18
(continued...)
Court No. 05-00329 Page 5

to this court. In his appeal, Mr. Anderson stated that despite

the fact that his income tax returns, which were based on cash

receipts, reflected an increase in his income over the period in

question, his true income, based on actual sales of salmon (the

“accrual method”) showed a decline in his income.6

5
(...continued)
(Dep’t Agric. Nov. 1, 2004) (final rule; technical amendments).
6
Mr. Anderson initially filed a complaint with the court on
April 25, 2005, after the 60 day filing period required by 19
U.S.C. § 2395(a); the 60 day filing period expired on April 5,
2005. Mr. Anderson produced documentation, in response to
Defendant’s argument that he was jurisdictionally barred from
pursuing his claim, that the USDA sent the letter notifying Mr.
Anderson of the denial of his request for TAA benefits to an
incorrect address despite the fact that the USDA had the correct
address on file. Pl.’s Reply Def.’s Resp. 2,5,6. Mr. Anderson
learned of the denial of his application for benefits when he
went to his local Farm Service Agency, and was informed that a
notice had been mailed to him (at the wrong address) and that the
stated time to appeal had expired. Mr. Anderson filed his appeal
anyway “assuming that it would be acceptable because it was the
Farm Service Agency’s fault that I was not informed of my
disapproval until after the 60 day period to appeal.” Id. 3.
Defendant, citing Irwin v. Dep’t of Veterans Affairs,
withdrew its 12(b)(1) motion, noting that Mr. Anderson
“demonstrated that he made a diligent effort to pursue his
claim.” Def.’s Reply 2, Irwin v. Dep’t of Veterans Affairs, 498
U.S. 89 (1990). Nevertheless, it is “always necessary that the
court determine its [own] jurisdiction irrespective of what
parties aver, or even agree among themselves." Brecoflex Co. v.
United States, 23 CIT 84, 86, 44 F. Supp. 2d 225, 228 (1999).
Defendant is correct in noting that the doctrine of
equitable tolling, as stated in Irwin v. Dept’t of Veteran’s
Affairs, 498 US 89, 95-96 (1990) would permit this claim.
However, as this court noted in Truong v. U.S. Sec’y of Agric.,
30 CIT __, Slip Op. 06-150, at 4 n.3 (Oct. 12, 2006), language in
the opinion of the Court of Appeals of the Federal Circuit in
Autoalliance Int’l Inc. v. United States may be read to indicate
otherwise. Autoalliance Int’l Inc v. United States, 357 F. 3d.
1290, 1294 (Fed. Cir. 2004) (rejecting tolling of 19 U.S.C. §
(continued...)
Court No. 05-00329 Page 6

C.

Because the USDA’s regulations defining net farm income

invoke the IRS code, the agency’s determination of a decline in

income between the relevant time periods depends on how that income

has been reported to the IRS. Pursuant to the IRS’s reporting

requirements, taxpayers must report their income for each year.

6
(...continued)
2636(a) because “in suits against the United States,
jurisdictional statutory requirements cannot be waived or
subjected to excuse based on equitable principles.” (citing
Mitsubishi Elecs. Am., Inc. v. United States, 18 CIT 929, 932,
865 F. Supp. 877, 880 (1994)).
Autoalliance notwithstanding, the court still finds that it
has jurisdiction over this case. Autoalliance dealt specifically
with tolling for suits brought under 19 U.S.C. § 2636(a), but did
not address equitable tolling under 19 U.S.C. § 2395, dealing
with trade adjustment assistance cases. Cf., Former Emples. of
BMC Software, Inc. v. United States Sec'y of Labor, 30 CIT __,
__, Slip Op. 06-132, at 9 (Aug. 31, 2006) (“The trade adjustment
assistance laws are remedial legislation and, as such, are to be
construed broadly to effectuate their intended purpose”) (citing
UAW v. Marshall, 584 F.2d 390, 396 (D.C. Cir. 1978)).
Additionally, it cannot be established that the clock
started running to establish a deadline for Mr. Anderson’s
filing. In Irwin, the Supreme Court held that the clock began
to run once the notice of final action was “received.” Irwin 498
US at 92. The statute in Irwin specifically stated that “the
complaint against the Federal Government under Title VII must be
filed ‘within thirty days of receipt of notice of the final
action taken by the EEOC.’” Id. (quoting 42 U.S.C. § 2000e-
16(c)(1988)). Unlike the statute at issue in Irwin, here, 19
U.S.C. § 2395(a) provides that a party “may, within sixty days
after notice of such determination, commence a civil action in
the United States Court of International Trade for review of [a
final] determination.” 19 U.S.C. § 2395(a). Though the two
provisions are dissimilar, the letter mailed to the wrong
address, when the correct address was on file, cannot constitute
notice. As such, the clock did not begin to run, and Mr.
Anderson’s claim is not barred on the basis of not being timely
filed.
Court No. 05-00329 Page 7

Recognizing that payment for goods and services frequently lags the

sale of such goods and services, the IRS code permits taxpayers to

report their income using two principle accounting methods: (1) the

cash receipts and disbursements method (“cash method”); and (2) an

accrual method.7 26 U.S.C. § 446(c).8

In plain terms,

7
The IRS code further allows taxpayers to report their
income using: any other method permitted by Chapter 1 of Title 26
of the U.S. Code; or any combination of the foregoing methods
permitted under regulations prescribed by the Secretary of the
Treasury. 26 U.S.C. § 446(c).
8
In defining these accounting methods, the IRS’ regulations
provide that

[G]enerally, under the cash receipts and disbursements
method in the computation of taxable income, all items
which constitute gross income (whether in the form of
cash, property, or services) are to be included for the
taxable year in which actually or constructively
received. Expenditures are to be deducted for the
taxable year in which actually made.

26 C.F.R. § 1.446-1(c)(1)(i)(2006) (emphasis added). In

contrast,

under an accrual method, income is to be included for the
taxable year when all the events have occurred that fix
the right to receive the income and the amount of the
income can be determined with reasonable accuracy. Under
such a method, a liability is incurred, and generally is
taken into account for Federal income tax purposes, in
the taxable year in which all the events have occurred
that establish the fact of the liability, the amount of
the liability can be determined with reasonable accuracy,
and economic performance has occurred with respect to the
liability.

26 C.F.R. § 1.446-1(c)(1)(ii)(A)(2006) (emphasis added).
Court No. 05-00329 Page 8

[t]he accrual method, as distinguished from the cash
receipts and disbursements method of accounting, reports
revenues when they are earned even though no cash may
have been received and reports expenses when they have
been incurred even though no payment of cash has been
made in connection with such expenses.

Charles H. Meyer, Accounting and Finance for Lawyers in a Nutshell
9
26 (3d ed. 2006).

Agriculture’s regulations do not distinguish between cash and

accrual accounting. Rather, when these accounting methods are

incorporated into Agriculture’s regulations, the regulations

implicitly define “net farm income” to mean either (a) a producer’s

cash receipts in a given year, or (b) the amount of income,

reported under the accrual method tracking the sales less expenses,

that the producer earns from agricultural production.

Consequently, Agriculture’s determination of a decline in income

between the relevant time periods depends on how that income has

been reported to the IRS.

To illustrate, consider two identical wheat farmers (Producer

A and Producer B) who, in all material respects, have the same

income stream. Producer A reports her income to the IRS on an

accrual basis and Producer B reports his income to the IRS on a

cash basis. Assume both make a sale in year 1 for $10 but do not

9
Once a taxpayer elects an accounting method, “[e]xcept as
otherwise expressly provided in [26 U.S.C. §§ 1 et seq.], a
taxpayer who changes the method of accounting on the basis of
which he regularly computes his income in keeping his books
shall, before computing his taxable income under the new method,
secure the consent of the [IRS].” 26 U.S.C. § 446(e).
Court No. 05-00329 Page 9

collect the proceeds of this sale until year 2; because of import

competition, both farmers are unable to sell any wheat in year 2.

At the end of year 2, the Secretary certifies wheat farmers for

trade adjustment assistance. By virtue of how they reported their

income to the IRS, Producer A will have reported her income to the

IRS as $10 in year 1, and $0 in year 2; Producer B would have

reported his income to the IRS as $0 in year 1 and $10 in year 2.

Consequently, under the Secretary’s definition of “net farm

income,” Producer A would qualify for adjustment assistance while

Producer B would not.10

D.

The underlying question presented by this case is whether

Agriculture’s application of its definition of net farm income is

lawful. The court’s review of such a question is guided by the

well-established test enunciated in Chevron U.S.A. Inc. v. Nat’l

Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984).

First, the court must consider whether Congress has “directly

10
Graphically:

Goods sold in year 1 with payment received in Year 2
Year 1 Year 2 Difference in income as
reported to IRS
Producer A 10 0 -10
(accrual method)
Producer B 0 10 +10
(cash method)
Court No. 05-00329 Page 10

spoken to the precise question at issue. If the intent of Congress

is clear, that is the end of the matter; for the court, as well as

the agency, must give effect to the unambiguously expressed intent

of Congress.” Id. However, “[i]f Congress has explicitly left a

gap for the agency to fill, there is an express delegation of

authority to the agency to elucidate a specific provision of the

statute by regulation. Such legislative regulations are given

controlling weight unless they are arbitrary, capricious, or

manifestly contrary to the statute.” Id.

In 19 U.S.C. § 2401e, Congress did not directly define net

farm income; rather, by requiring that a “producer’s net farm

income (as determined by the Secretary)” decline, Congress left an

explicit gap for the Secretary to fill . See Steen v. Sec’y of

Agric., 29 CIT __, 395 F. Supp. 2d 1345 (2005). The phrase “as

determined by the Secretary” provides “an express delegation of

authority to the agency to elucidate a specific provision of the

statute by regulation.” Transitional Hosps. Corp. of La. v.

Shalala, 222 F.3d 1019, 1025 (D.C. Cir. 2000) (citing Chevron, 467

U.S. at 843-44); But cf. Selivanoff v. U.S. Sec’y of Agric., 30 CIT

__,__, Slip Op. 06-55, at 11-12 (April 18, 2006). Accordingly, the

court may only reject the Secretary’s definition if she exercises

her discretion unreasonably. Transitional Hosps. Corp., 222 F.3d

at 1025.

The Secretary filled the statutory gap through 7 C.F.R.
Court No. 05-00329 Page 11

§ 1580.102, stating “Net fishing income means net profit or loss,

excluding payments under this part, reported to the Internal

Revenue Service for the tax year that most closely corresponds with

the marketing year under consideration.” 7 C.F.R. § 1580.102.

Accordingly, this regulation, issued under a specific grant of

congressional rulemaking authority, has “legislative effect,” see

Batterton v. Francis, 432 U.S. 416, 425 (1977), and the court will

pay a “very high degree of deference” to the regulation, “unless

they are arbitrary, capricious, or manifestly contrary to the

statute.’” Schuler Indus., Inc. v. United States, 109 F.3d 753, 755

(Fed. Cir. 1997) (quoting Chevron, 467 U.S. at 844). Thus, the

court must defer to the regulation “unless the Secretary's

interpretation is contrary to clear congressional intent or

frustrates the policy Congress sought to implement.” Schneider v.

Chertoff, 450 F.3d 944, 960 (9th Cir. 2006). Further, where, as

here, Congress has not specifically mandated individual

determinations, “[t]he administration of public assistance based on

a formula is not inherently arbitrary.” Schweiker v. Gray

Panthers, 453 U.S. 34, 48 (1981). Barnhart v. Thomas, 540 U.S. 20,

29 (2003) (“Virtually every legal (or other) rule has imperfect

applications in particular circumstances.”) (emphasis in original).

It follows that, in filling the gap left in the statute, the

Secretary’s regulation may discriminate between similarly situated

parties on grounds related to the statutory purpose underlying
Court No. 05-00329 Page 12

their actions. Stereo Broadcasters, Inc. v. FCC, 652 F.2d 1026,

1029 n. 5 (D.C. Cir. 1981) (citing Garrett v. FCC, 513 F.2d 1056,

1060 (D.C. Cir. 1975). This is because regulations inevitably

discriminate to some extent, and "[s]ome over- and

under-inclusiveness would not be fatal to [a regulation] if the

[agency] gave a reasonable justification for administering only

rough justice." Athens Cmty. Hosp., Inc. v. Shalala, 21 F.3d 1176,

1180 (D.C. Cir. 1994). The fact that there exists a hypothetical

scenario in which the rule might lead to an arbitrary result does

not render the rule “arbitrary or capricious.” Am. Hosp. Ass'n v.

N.L.R.B., 499 U.S. 606, 619 (1991).

Nonetheless, despite the high level of deference the court

accords to the Secretary, the court cannot uphold the application

of a regulation if it is “[in]consistent with the fundamental

principles of liberty and justice which lie at the base of our

civil and political institutions. . . .” Buchalter v. New York,

319 U.S. 427, 429 (1943) (citing Hebert v. Louisiana, 272 U.S. 312,

316-17 (1926)). One fundamental principle of law and justice is

that like cases should be treated alike. It is well-established

that the law should “‘act alike in all cases of like nature.'"

See, e.g., Henry J. Friendly, Indiscretion About Discretion, 31

Emory L. J. 747, 758 (1982) (quoting Rex v. Wilkes, 98 Eng. Rep.

327, 335 (1770) (opinion of Lord Mansfield); eBay Inc. v.

MercExchange, L.L.C., 126 S. Ct. 1837, 1841-42 (2006) (“limiting
Court No. 05-00329 Page 13

discretion according to legal standards helps promote the basic

principle of justice that like cases should be decided alike”);

Taber v. Maine, 67 F.3d 1029, 1038 (2d Cir. 1995) (“treating like

cases alike is the great engine of the law”).

The agency must “explain the relevance of those [arbitary]

differences to the purposes of the [Act].” Melody Music, Inc. v.

FCC, 345 F.2d 730, 733 (D.C. Cir. 1965). The Secretary may justify

discriminating between individuals on grounds of administrative

convenience, but ease of administration does not obliterate the

Secretary’s obligation to provide substantial evidence and follow

fundamental principles of justice. Gulf Oil Corp. v. Hickel, 435

F.2d 440, 446 (D.C. Cir. 1970) (citing Carmichael v. S. Coal & Coke

Co., 301 U.S. 495, 511 (1937)) (“An agency confronted with a

complex task may rationally turn to simplicity in ground rules, and

administrative convenience, at least where no fundamental injustice

is wrought”); United States v. Udy, 381 F.2d 455, 458 (10th Cir.

1967) (“ease of administration does not make an administrative

determination any the less arbitrary when it otherwise had no

substantial evidence to support it”).

An agency rule may still be found arbitrary and capricious

if the agency has relied on factors which Congress has
not intended it to consider, entirely failed to consider
an important aspect of the problem, offered an
explanation for its decision that runs counter to the
evidence before the agency, or is so implausible that it
could not be ascribed to a difference in view or the
product of agency expertise.
Court No. 05-00329 Page 14

State Farm, 463 U.S. at 43. Therefore, courts have found that there

exist some circumstances where it is impermissible for a rule to

arbitrarily distinguish between similarly situated individuals.

See Capital Cities Commc’ns, Inc. v. FCC, 554 F.2d 1135 (D.C. Cir.

1976); Melody Music, 345 F.2d 730.11

Agencies have a responsibility to administer their statutorily

accorded powers fairly and rationally, which includes not

“treat[ing] similar situations in dissimilar ways.” Burinskas v.

N.L.R.B., 357 F.2d 822, 827 (D.C. Cir. 1966) (citing Melody Music,

345 F.2d 730). Indeed, a principal justification for the

administrative state is that in “areas of limitless factual

variations, like cases will be treated alike.” Nat’l Muffler

Dealers Ass’n v. United States, 440 U.S. 472 (1979)(internal

citations omitted); South Shore Hosp., Inc. v. Thompson, 308 F.3d

91, 101 (1st Cir. 2002) (“The goal of regulation is not to provide

exact uniformity of treatment, but, rather, to provide uniformity

of rules so that those similarly situated will be treated alike”).

Courts will therefore not defer to an agency regulation or

adjudicative decision when they produce results which are

arbitrary, capricious, or manifestly contrary to the statutory

scheme. Exxon Corp. v. United States, 40 Fed. Cl. 73, 86 (1998)

11
In reviewing that reasonableness of an agency’s
regulation, the court applies a more stringent level of scrutiny
than a rational basis inquiry under the Due Process Clause of the
Fifth Amendment.
Court No. 05-00329 Page 15

(citing Chevron, 467 U.S. at 844); Schuler Indus., Inc. v. United

States, 109 F.3d at 755; Schneider v. Chertoff, 450 F.3d at 960.

DISCUSSION

The issue in this case arises because the USDA “defines” net

income by grafting the “net income” figure from the producer’s

income taxes into the USDA’s own regulatory framework. By relying

only on the income farmers (and fishermen) report to the IRS12, and

not distinguishing between accounting techniques, the USDA will

not, in some circumstances, be treating like persons alike. This

is because once a taxpayer has chosen a particular method of

computing and reporting taxable income for income tax purposes, he

cannot change methods without the approval of the Commissioner of

the IRS. See 26 U.S.C. § 446(e).

As explained above, where the taxpayer has chosen the cash

method, items are included in the taxable year in which they have

been actually or constructively received. 26 C.F.R.

§ 1.446-1(c)(1)(i). The cash method does not attempt to accurately

match expenses with income in a single year. See, e.g., Bonaire

Dev. Co. v. Comm’r, 679 F.2d 159, 162 (9th Cir. 1982); Jacob

12
The USDA also allows for supplemental information to be
submitted to augment the information provided by “net fishing
income.” See 7 C.F.R. § 1580.301(e)(6); see also Selivanoff v.
Sec’y of Agric., 30 CIT __, Slip Op. 06-55, at 10 n. 4 (Apr. 18,
2006); Trinh v. Sec’y of Agric., 29 CIT __,__, 395 F. Supp. 1259,
1271-72 (2005). Apparently, the agency did not utilize this
provision in considering Mr. Anderson’s case.
Court No. 05-00329 Page 16

Mertens, Jr., 2 Mertens Law of Fed. Income Tax'n § 12:14 (2006)

(“Under the cash method, there is no necessary correlation between

the period that income is earned and the period that payments are

received”). Thus, for cash method taxpayers, it is the actual or

constructive receipt of the income, rather than the time it is

earned, that determines its includability in income. 26 U.S.C.

§ 451(a).

It is well-established that the cash method usually leads to

distorted income statements for any one taxable year. See, e.g.,

Frysinger v. Comm’r, 645 F.2d 523, 527 (5th Cir. 1981). However,

the “sacrifice in accounting accuracy under the cash method

represents an historical concession by the Secretary and the

Commissioner to provide a unitary and expedient bookkeeping system

for farmers and ranchers in need of a simplified accounting

procedure.” United States v. Catto, 384 U.S. 102, 116 (1966); see

also Frysinger, 645 F.2d at 527 (finding the Commissioner has

specifically granted farmers the special privilege of using the

cash method despite the high probability for substantial

distortions of income in any one taxable year). For income

reporting purposes, the distortions are not considered material

because “over a period of years the distortions will tend to cancel

out each other.” Van Raden v. Comm’r, 71 T.C. 1083, 1104 (1979);

see also Spitalny v. United States, 430 F.2d 195, 197 (9th Cir.

1970).
Court No. 05-00329 Page 17

In contrast to the cash method, the accrual method allows

taxpayers to “charg[e] against income earned during the taxable

period, the expenses incurred in and properly attributable to the

process of earning income during that period.” United States v.

Anderson, 269 U.S. 422, 440 (1926). Although the IRS may allow the

taxpayer to use either the cash or accrual method, the taxpayer’s

reported income may be substantially different for the years in

question depending on their choice of reporting method. See, e.g.,

Ralston Dev. Corp. v. United States, 937 F.2d 510, 513 (10th Cir.

1991) (finding substantial differences in the results achieved

under the cash and accrual methods); see also supra, pp. 8-9.

This is not the first time that distortions related to the

differences between cash and accrual accounting have raised

concern. In Catto, for example, the Supreme Court considered the

Commissioner’s authority to approve a taxpayer’s request to

transition from using one method of accounting to another. Catto,

384 U.S. at 116. In approving the Commissioner’s authority under

the facts of that case, the Court found that the plaintiffs had

meaningfully elected their accounting technique. In the course of

so holding, however, the Court suggested that:

particular legislative or administrative mutations in the
tax laws may foster inequities so great between taxpayers
similarly situated that the Commissioner could not
legitimately reject a proposed change in accounting
method unless the taxpayer had exercised a meaningful
choice at the time he [or she] selected his [or her]
contemporary method.
Court No. 05-00329 Page 18

Id. at 115-16. This leaves open the possibility that there is

some level of inequity that would not allow for the different

accounting methods to be used interchangeably.

Both of the concerns identified above are necessarily present

here: (1) Plaintiff elected his accounting technique long before

knowing the consequences that his election would have on his

eligibility for trade adjustment assistance (therefore, one could

hardly attribute to him a meaningful election); and (2) because the

statute and regulations focus on one year intervals, distortions

do not necessarily cancel out each other. Consequently, there can

be no doubt that the application of the regulation here

differentiates amongst farmers or fishermen soley on the basis of

their income-reporting method to the IRS.

In defense, the government claims that the requirement that

“net farm income” and “net fishing income” be consistent with what

was reported to the IRS, regardless of whether the income was

reported on an accrual or cash basis, is necessary to prevent

fraud. See Def.’s Supp. Br. Resp. Ct.’s Questions 5 (“Def.’s Supp.

Br.”) (“Without a requirement that ‘net farm income’ and ‘net

fishing income’ be consistent with what is reported to the IRS, a

producer could manipulate the ‘net farm income’ reported to the

USDA while at the same time potentially making large year over year

profits.”) The Defendant also claims that this conforms to the

IRS’s requirement that a “taxpayer must use the same accounting
Court No. 05-00329 Page 19

method to figure [their] taxable income and to keep their books.”

Id. at 5-6. Additionally, the government argues that a contrary

rule would potentially require a TAA beneficiary to maintain two

separate sets of books, which is “specifically disallowed by IRS

rules.” Id. at 6.

While the government points to the possibility of fraud, it

has not explained how such fraud would occur. Additionally, and

more importantly, the reasons given as to why it would be

unworkable, or not material, for the USDA to consider evidence

that, as measured on an accrual basis, Mr. Anderson’s income has

declined on a year-over-year basis, are all post-hoc

rationalizations. The USDA has stated that it relies on income as

reported to the IRS, and using that parameter, Mr. Anderson’s

income did not decrease. As such, the USDA did not comment on the

issues that are raised by Mr. Anderson’s claim. Accordingly, any

of the explanations offered by the government counsel here are

post-hoc rationalizations, and therefore do not constitute a

sufficient basis for the court to reach a decision on the legality

of the Defendant’s determination. As stated by the Supreme Court:

a reviewing court, in dealing with a determination or
judgment which an administrative agency alone is
authorized to make, must judge the propriety of such
action solely by the grounds invoked by the agency. If
those grounds are inadequate or improper, the court is
powerless to affirm the administrative action by
substituting what it considers to be a more adequate or
proper basis. To do so would propel the court into the
domain which Congress has set aside exclusively for the
Court No. 05-00329 Page 20

administrative agency.

SEC v. Chenery Corp., 332 U.S. 194, 196 (1947). See also

Burlington Truck Lines Inc. v. United States, 371 U.S. 156, 168

(1962) (“courts may not accept appellate counsel's post hoc

rationalizations for agency action”).

The need for the agency to consider these issues and provide

its own rationale for a particular determination is particularly

acute when, as here, the agency has failed to consider an important

aspect of a problem. See State Farm 463 U.S. at 43. Though an

agency has the right to draw a line on the basis of efficiency, see

Barnhart, 540 U.S. at 29, at the same time, the agency has to be

aware of the line that it is drawing and provide some basis for

drawing that line, Stereo Broadcasters, 652 F.2d at 1029 n. 5;

Athens Cmty. Hosp., Inc, 21 F.3d at 1180.13

13
In the notice and comment period for 7 C.F.R. § 1580.102,
the USDA did receive comments on the “net farm income” definition
which it addressed. Specifically,

[t]hree respondents expressed concern that producers
managing diversified farms might not qualify for
adjustment assistance payments due to higher earnings
from sales of other commodities. The purpose of TAA is
to assist producers to adjust to imports by providing
technical assistance to all and cash payments to those
facing economic hardship. The final rule leaves
unchanged the requirement that producers certify to a
decline in net farm income, as reported on Internal
Revenue Service Schedule F (Form 1040) and Form 4835,
in order to receive a cash payment. However, the final
rule does exclude TAA payments from being considered
part of net farm income in subsequent qualifying years.
(continued...)
Court No. 05-00329 Page 21

Nevertheless, it is also unquestionably true that whatever

definition of “net farm income” the Secretary adopts will

undoubtedly lead to some artificial distinctions between those who

qualify for benefits and those who do not. See, e.g., Capital

Cities Commc’ns, 554 F.2d at 1139 (“Such line-drawing problems are

always with us. Any classification which requires drawing a line is

necessarily arbitrary to some extent.”). Here, however, the USDA

has not provided an explanation as to why it has drawn this line,

and why the discriminatory effects of such a line are acceptable.

Nor has the USDA considered the reasonableness of this result

compared to other available alternatives. Cf. Barnhart 540 U.S. at

29.

Therefore, the court remands this determination to the USDA

for it to consider the reasonableness of its regulation as applied

to Mr. Anderson, in view of the differences in cash versus accrual

accounting, the inequities the agency’s application presents, and

the fact that applicants elect their accounting technique without

13
(...continued)
Otherwise, TAA payments might be the cause for
excluding producers from receiving the full benefits of
the program.

7 CFR Part 1580: Trade Adjustment Assistance for Farmers, 69 Fed.
Reg. 50,048, 50,049 (Dep’t Agric. Aug. 20, 2003)(final rule).
There is no record that during the notice-and-comment period, or
in the consideration of Mr. Anderson’s application, the USDA
considered the unique situation that farmers and fishermen, as
individual producers, find themselves in, insofar as they are
able to report their income on either a cash or accrual basis.
Court No. 05-00329 Page 22

knowing that it could adversely impact their eligibility for

benefits in the future. On remand, the agency shall reconsider its

position and may reopen the record to permit an acceptable

alternative solution.

CONCLUSION

For the foregoing reasons, the court remands this matter for

further consideration consistent with this opinion. The agency

shall have until December 1, 2006, to provide a remand

determination. Plaintiff shall submit comments on the remand

determination no later than December 15, 2006, and the government

shall submit rebuttal comments no later than January 3, 2007.

SO ORDERED.

Dated: November 1, 2006
New York, N.Y.

/s/ Donald C. Pogue
Donald C. Pogue, Judge