IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________________
No. 01-60978
__________________________
COMMISSIONER OF INTERNAL REVENUE,
Petitioner-Appellant,
versus
BROOKSHIRE BROTHERS HOLDING, INC. and
SUBSIDIARIES,
Respondent-Appellee.
___________________________________________________
Appeal from a Decision
of the United States Tax Court
___________________________________________________
January 29, 2003
Before JOLLY, DUHÉ, and WIENER, Circuit Judges.
Wiener, Circuit Judge:
Petitioner-Appellant Commissioner of Internal Revenue
(“Commissioner” or “government”) appeals an adverse judgment of the
United States Tax Court (“Tax Court”) which held that, for income
tax years 1996 and 1997, Respondent-Appellee Brookshire Brothers
Holding, Inc. and Subsidiaries (collectively, “Brookshire” or
“taxpayer”) did not make an unauthorized change in its “method of
accounting” in violation of § 446(e) of the Internal Revenue Code
(“IRC”). We affirm.
I. Facts and Proceedings
The Tax Court decided this case on stipulated facts.
Historically, Brookshire has operated grocery stores or
supermarkets, primarily in the State of Texas. The parent and
subsidiary corporations constitute an affiliated group that employs
the accrual method of accounting and files a consolidated federal
income tax return for tax years that end on the last Saturday in
April. Pursuant to IRC § 168, Brookshire has always used the
modified accelerated cost recovery system (“MACRS”) for purposes of
depreciating the tangible assets here at issue.
Beginning in 1991, Brookshire undertook construction of gas
station properties at grocery store locations in Texas. In the
initial years, Brookshire’s corporate tax returns identified the
gas stations as non-residential real property which, under the
MACRS rules, reported depreciation on a straight-line method for
periods of 31.5 or 39 years for its 1993-95 tax years. Brookshire
subsequently filed amended returns for those three tax years,
reclassifying the gas stations as 15-year property —— still under
the MACRS’s rules, however —— recalculating depreciation on the
150% declining balance method over a recovery period of 15 years.
The amended returns contain the following statement:
THE DETERMINATION WAS MADE THAT GAS STATION
CONVENIENCE STORES SHOULD BE RECLASSED FROM
31.5 AND 39 YEAR PROPERTY TO 15 YEAR PROPERTY
BASED ON THE ATTACHED MEMO.
The attached memo was an ISP entitled “Industry Specialization
2
Program Coordinated Issue Paper for Petroleum and Retail
Industries,” which had been issued by the Internal Revenue Service
(“IRS”) effective March 1, 1995. The IRS accepted those amended
returns and issued refunds to Brookshire in the full amounts
claimed for tax years ending in 1993 and 1994, and in a partial
amount for the tax year ending in 1995.
Thereafter, Brookshire timely filed corporate tax returns for
the tax years here at issue, those ending in April, 1996 and 1997,
continuing to classify and depreciate the gas station properties in
the same manner that had been employed in the amended returns for
1993-95. Brookshire never filed an Application for Change in
Method of Accounting (Form 3115) for the gas station properties:
not in connection with the initial returns for 1993-95; not in
connection with the amended returns for those years; and not in
connection with the returns for 1996 and 1997. The Commissioner
issued a deficiency notice following IRS examinations of
Brookshire’s returns for tax years ending in April, 1996 and 1997,
asserting, inter alia, that Brookshire’s depreciation deductions
for those years had to be decreased because Brookshire had changed
its accounting method without obtaining prior consent from the
Commissioner pursuant to IRC § 446(e).
IRC § 446(e) requires that “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
3
income under the new method, secure the consent of the Secretary.”1
Treasury Reg. § 1.446-1(e)(2)(i) specifies that “a taxpayer who
changes the method of accounting employed in keeping his books”
shall obtain the consent of the Secretary “before computing his
income upon such new method for purposes of taxation” regardless of
“whether or not such method is proper or is permitted under the
Internal Revenue Code or the regulations thereunder.”2 The
Commissioner does not contend that the method used by Brookshire
for 1996 and 1997 is either improper or not permitted.
Treasury Reg. § 1.446-1(e)(3)(i) instructs that “to secure the
Commissioner’s consent...the taxpayer must file an application on
Form 3115 with the Commissioner during the taxable year in which
the taxpayer desires to make the change in method of accounting”
(emphasis added).3 If that which Brookshire did regarding gas
station depreciation constituted a “change in method of
accounting,” the year in which Brookshire “desire[d] to make the
change” was its tax year ending in April, 1993, the one for which
Brookshire first employed the declining balance/15-year term; for
the preceding years in which the gas station properties were in
service and depreciated for tax purposes, Brookshire reported
depreciation on a straight line/31.5 or 39 year basis. But, as
1
26 U.S.C. § 446(e) (2000).
2
Treas. Reg. § 1.446-1(e)(2)(i) (as amended in 2001).
3
Treas. Reg. § 1.446-1(e)(3)(i) (as amended in 2001).
4
counsel for the Commissioner confirmed at oral argument, 1993 and
the other years covered by the amended returns are closed,
explaining why the IRS challenged Brookshire’s corporate income tax
returns only for tax years ending in 1996 and 1997 —— the earliest
ones remaining open —— despite the fact that neither 1996 nor 1997
was “the” year for which Brookshire desired to make, and did make,
the alleged change. Obviously, there can be only one such tax
year, and here it was the one ending in April, 1993.
Brookshire filed a petition in the Tax Court seeking
redetermination of the deficiencies asserted against it for the
years ending 1996 and 1997. After Brookshire and the Commissioner
consented to have the case decided on stipulated facts, the Tax
Court ruled in Brookshire’s favor. The Commissioner timely filed
a notice of appeal.
II. Analysis
A. Standard of Review
In general, we review appeals from the Tax Court as we do
those from district courts: Determinations of fact are reviewed
for clear error; rulings of law are reviewed de novo.4 As this
case was tried on stipulated facts, the only issues before us are
conclusions of law, so our review of this case is entirely plenary.
B. Agreement with the Reasoning of the Tax Court
After quoting IRC § 446(e) and the pertinent portions of the
4
Estate of Jameson v. Commissioner, 267 F.3d 366, 370 (5th
Cir. 2001).
5
applicable Treasury Regulations, the Tax Court noted that a change
in accounting method “includes a change in the overall plan of
accounting for gross income or deductions or a change in the
treatment of any material item used in such overall plan.”5 The
Tax Court also noted that a “material” item “is any item which
involves the proper time for the inclusion of the item in income or
the taking of a deduction.”6 Without deciding whether Brookshire’s
shift from non-residential real property to 15-year property for
purposes of depreciation of the gas station properties constituted
a change in accounting method for purposes of IRC § 446, the Tax
Court observed that express exclusions are set forth in the
regulations for specific types of adjustments that are not to be
characterized as changes in accounting method. The court cited two
relevant statements from Treas. Reg. 1.446-1(e)(2)(ii)(b):
[A] change in method of accounting does not
include adjustment of any item of income or
deduction which does not involve the proper
time for the inclusion of the item of income
or the taking of a deduction.
...
In addition, a change in the method of
accounting does not include...an adjustment in
the useful life of a depreciable asset.7
5
Treas. Reg. 1.446-1(e)(2)(ii)(a)(as amended in
2001)(emphasis added). For the Tax Court’s reasoning, see
Brookshire Bros. Holding, Inc. v. Commissioner, 81 T.C.M. (CCH)
1799, 1802-04 (2001).
6
Id. (emphasis added).
7
Treas. Reg. § 1.446-1(e)(2)(ii)(b) (as amended in 2001).
6
The Tax Court began its detailed analysis by quoting its long-
standing position that “[w]hen an accounting practice merely
postpones the reporting of income, rather than permanently avoiding
the reporting of income over the taxpayer’s lifetime, it involves
the proper time for reporting income.”8 The court observed that
Brookshire neither altered its overall plan of accounting for
income and deductions on an accrual basis nor changed its basic
system of accounting for depreciation under MACRS. The change from
straight line deduction of depreciation over a 31.5 or 39 year
period to the declining balance method over a 15-year period,
however, impressed the Tax Court as involving the timing of
deductions rather than the total amount of lifetime income. At
first glance, this appeared to be a material difference and thus
potentially a change in accounting method. According to the court,
however, this putative change is subject to the exception earlier
noted that an adjustment in the useful life of a depreciable asset
does not constitute a change in the taxpayer’s method of
accounting, regardless of the fact that these kinds of adjustments
may involve the time for taking such deductions.9
For the Tax Court, Brookshire’s change within MACRS from the
lengthy straight line approach to the shorter declining balance
approach cannot constitute a material alteration for purposes of
8
Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 510
(1989).
9
See Treas. Reg. § 1.446-1(e)(2)(ii)(b).
7
IRC § 446(e) if that change properly falls under the “useful life”
exception of the regulations. The Commissioner insists that
“useful life” is an obsolescent term of art that did not survive
adoption of MACRS. The implication of the Commissioner’s argument
is that the useful life exception died with the adoption of ACRS,
as amended by MACRS, so that —— absent a new regulation applying
the concept to the “arbitrary”10 times available for depreciation
deductions —— there is no basis of excepting a change like
Brookshire’s by analogy to useful life.
The Tax Court perceived the useful-life analogy as being
apposite to the instant situation and saw no distinguishing
difference for purposes of applying the useful-life exception here.
It did, however, find somewhat troubling the linkage of recovery
period and depreciation method under MACRS, as there had been no
such linkage under the prior, useful-life system.11
The Tax Court discerned a dilemma arising from, on the one
10
Although the useful-life system had its genesis in a
theoretical nexus between the myriad types of depreciable
property and the actual term of utility for each type, in reality
the various terms of useful life argued and accepted by the
government impress us as having been no less arbitrary than the
terms assigned under ACRS and MACRS.
11
The court read prior Tax Court precedent as
distinguishing a change in depreciation method from a change in
timing, citing Standard Oil Co. (Indiana) v. Commissioner, 77
T.C. 349, 410-11 (1981) and Casey v. Commissioner, 38 T.C. 357,
384-87 (1962) as recognizing a dichotomy that would not exclude
the former from the consent requirement on the basis of the
useful-life exception. Candidly, we do not read the cases as
making that distinction.
8
hand, the analogy between the years for depreciating assets under
MACRS and the old useful-life system, and, on the other hand, the
MACRS linkage of depreciation method and period of recovery. The
court nevertheless concluded that analogizing the treatment of
useful life as an exception pursuant to the never-repealed, pre-
MACRS regulation better accords with the overall regulatory scheme
of the Tax Code and regulations than would the denial of the
exception on the slender reed of that apparent linkage.
Even though we perceive no such dilemma, we fully agree with
the Tax Court that the applicable regulations were meant to allow
taxpayers to make temporal changes in their depreciation schedules
without prior consent of the Commissioner. Clearly, doing so would
produce changes in the length of time over which deductions are
taken as well as concomitant changes in the amount of the deduction
for any given tax year —— and such a change under MACRS would
produce exactly the same results. It follows that we also agree
with the Tax Court’s resolution of its perceived dilemma by holding
that Brookshire’s change in the classification of its gas station
properties from straight line depreciation of non-residential real
estate to declining balance depreciation of 15-year property does
not equate with a change in the taxpayer’s method of accounting for
purposes of IRC § 446. And, absent such a change, consent of the
Commissioner was not required. We affirm the judgment of the Tax
9
Court for the reasons given in its Memorandum Opinion.12
C. The Commissioner’s Challenge to the Wrong Tax Years
Brookshire urges on appeal, as in the Tax Court, that the
Commissioner’s acceptance of the amended returns for tax years
ending 1993-95, including payment of refunds to Brookshire for its
overpayment of taxes under the original returns for those years,
amounts to consent by the Commissioner for such a change, even if
it is assumed arguendo that, as a matter of law, the
reclassification of the gas station properties did constitute a
change in accounting method for purposes of IRC § 446(e). Not
surprisingly, the Commissioner has taken the position —— and
forcefully urged it again at oral argument —— that acceptance of
amended returns, including payment of refunds based on such
returns, does not bind the government on indirect issues such as
consent; neither does such acceptance constitute waiver, estoppel,
or other preclusion of a subsequent challenge by the Commissioner
to positions taken by the taxpayer in such returns.
Because we need not, we do not decide what preclusive effects,
if any, the Commissioner’s acceptance of amended returns or actions
based on them might produce. Rather, we address the significance
of the pervasive time bar in the federal taxation scheme to
challenges that the Commissioner would mount in contesting the
positions taken by the taxpayer in years that are no longer open,
12
Brookshire Bros. Holding, Inc. v. Commissioner, 71 T.C.M.
(CCH) 1799 (2001).
10
i.e., closed years. When we do so, we conclude that the
Commissioner is barred from assessing a deficiency for the
challenged tax years of 1996 and 1997 grounded solely on
Brookshire’s failure to obtain consent pursuant to IRC § 446(e):
Brookshire made no change in either of the challenged years; if a
change were made at all, it was in a prior year that was closed
before the Commissioner assessed a deficiency.
The first tax year for which Brookshire reported the
depreciation of its gas station properties under the declining
balance, 15-year provision of MACRS was its tax year ending in
April, 1993. For all subsequent tax years, including those for
which the Commissioner would now assess deficiencies, Brookshire
consistently took depreciation for its gas station properties the
same way it did for 1993. Thus, even if we assume arguendo that
there was a change in accounting methods at all and that it was not
exempt under the useful-life exception, there still was only one
change, and it is the one that was made for Brookshire’s tax year
ending April, 1993. As depreciation for all the following years
was treated identically, there was no change for any subsequent
year, specifically none for the tax years ending April, 1996 and
1997.
Therefore, for the Commissioner to challenge, as an
unauthorized change in method, Brookshire’s switch from straight
line to declining balance under MACRS, he would have to have done
so for 1993, the year for which that putative change was
11
instituted. Yet, as noted, 1993 was closed by the time the
Commissioner assessed a deficiency, barring the Commissioner from
challenging the alleged change in method implemented for that year
—— specifically for purposes of this case, the change in
depreciation treatment for the gas station properties that was
instituted by Brookshire in the amended return for its now-closed
year ending April, 1993.
As noted, Treas. Reg. § 1.446-1(e)(3)(i) requires the taxpayer
to secure the Commissioner’s consent “during the taxable year in
which the taxpayer desires to make the change in method of
accounting” (emphasis added). We conclude that, inasmuch as (1)
the purported change now challenged by the Commissioner for the
open years of 1996 and 1997 was not made in the returns for either
of those years but instead was made in the return for the tax year
ending 1993, and (2) there has been only that one change, the
Commissioner is barred from challenging as unauthorized the change
made first for purposes of the closed year of 1993. Stated
differently, even if we assume that there was such a change and
that the Commissioner could not be held to have consented to it by
accepting amended returns and paying refunds for the years covered
by such returns (i.e., no alternative or implied consent, no
waiver, no preclusion), he is nevertheless (1) time barred from
asserting lack of consent for the closed tax year ending in 1993,
and (2) precluded from challenging the continued use of the
putative 1993 change by assessing deficiencies in subsequent, open
12
years, beginning with 1996. This is so because no change —— either
authorized or unauthorized —— was made for any tax year after 1993:
The depreciation method employed by Brookshire in the income tax
returns for the years 1996 and following had been implemented for
tax year 1993 and employed in all subsequent years without further
change. Thus, even assuming arguendo that Brookshire Brothers
violated IRC § 446(e) when it submitted its amended returns for
1993, 1994, and 1995, once those tax years closed, Brookshire
Brothers had a legally unassailable history of accounting treatment
that did not thereafter “change,” either in 1996 or in the original
returns for that and subsequent open years. As such, Treas. Reg.
§ 1.446-1(e)(3)(i) plays no part in the analysis of those open
years, because returns were timely prepared and filed without any
change in the treatment of depreciation of the gas station
properties. As the same treatment was employed consistently and
without change in the taxpayer’s returns covering of the three
preceding (closed) years, there could be no “change” for 1996 and
following. Simply put, we cannot approbate the Commissioner’s
collateral, back-door attack to get around the time bar for closed
years.
III. Conclusion
For the foregoing reasons, we agree with the analysis of the
Tax Court that the kind of change implemented by Brookshire for tax
years ending in April, 1993 and following is the functional
equivalent of a change in useful life, no more and no less.
13
Consequently, the useful life exception, which still exists in the
regulatory scheme applicable to the instant case, exempted
Brookshire from the need to have obtained the consent of the
Commissioner under IRC § 446(e) by filing a Form 3115 before
implementing the alleged change in accounting method.
Furthermore, even if Brookshire’s shift in reporting
depreciation on its gas station properties from straight line/31.5
or 39 year to declining balance/15 year were to be deemed to
constitute a change in accounting methods for purposes of IRC §
446, and such a change were not to be deemed exempt, under the
useful-life exception, from IRC § 446(e)’s requirement of prior
Commissioner consent, the instant assessment of a deficiency
against Brookshire for tax years ending 1996 and 1997 must
nevertheless fail. The change in accounting method asserted by the
Commissioner did not occur in those years: Rather, the only change
alleged by the Commissioner was made for Brookshire’s now-closed
tax year ending 1993, and it is immune from challenge by virtue of
the time bar applicable to closed years.
For these reasons, the judgment of the Tax Court in favor of
Brookshire is, in all respects,
AFFIRMED.
14