In the
United States Court of Appeals
For the Seventh Circuit

No. 00-2668

U.S. Freightways Corp.,
f.k.a. TNT Freightways Corp.,
and Subsidiaries,

Plaintiff-Appellant,

v.

Commissioner of Internal Revenue,

Defendant-Appellee.

Appeal from the United States Tax Court.
No. 459-98--Arthur L. Nims, III, Judge.

Argued January 18, 2001--Decided November 6, 2001



  Before Bauer, Manion, and Diane P. Wood,
Circuit Judges.

  Diane P. Wood, Circuit Judge. This is an
appeal from the United States Tax Court’s
decision affirming the Commissioner’s
determination that U.S. Freightways Corp.
(Freightways) improperly deducted certain
expenses during the 1993 tax year.
Although we acknowledge that even after
United States v. Mead Corp., 

(2001), we owe some deference to the
Commissioner’s interpretation of his own
regulations, we conclude here that the
lack of any sound basis behind the
Commissioner’s interpretation, coupled
with a lack of consistency on the
Commissioner’s own part, compels us to
rule in favor of Freightways. Because the
Tax Court did not reach the
Commissioner’s alternative argument that
Freightways’ method of accounting for the
expenses in question did not clearly
reflect its income, we remand for the
limited purpose of allowing that court to
consider this issue in the first
instance.

I

  This case was tried before the Tax Court
on stipulated facts. Freightways is a
long-haul freight trucking company that
operates throughout the continental
United States. In 1993, it had a fleet of
14,766 trucks and was growing. Every year
it is required to purchase a large number
of permits and licenses and to pay
significant fees and insurance premiums
in order legally to operate its fleet of
vehicles. These items are referred to
collectively as FLIP expenses in the
record, and we will follow that
convention. During the 1993 tax year,
Freightways’ FLIP expenses totaled
$5,399,062. None of the licenses and
permits at issue was valid for more than
twelve months, nor did the benefits of
any of the fees and insurance premiums
paid extend beyond a year from the time
the expense was incurred. But because the
various FLIP expenses were incurred at
different times during the tax year,
Freightways enjoyed the benefits of a
substantial portion of them in more than
one tax year. According to Freightways’
own accounting, $2,984,197, or
approximately 55%, of the FLIP expenses
it incurred in 1993 actually benefitted
the company during 1994.

  Despite the subsequent tax year benefits
of its FLIP expenses, Freightways, which
otherwise uses the accrual accounting
method for bookkeeping and tax reporting
purposes, deducted the entire $5,399,062
in FLIP expenses on its 1993 federal
income tax return. This had been its com
mon practice for a number of years. After
auditing Freightways’ tax return, the
Commissioner concluded that Freightways
should have capitalized its 1993 FLIP
expenses and deducted them ratably over
the 1993 and 1994 tax years. Freightways
disputed this conclusion and petitioned
the Tax Court for a redetermination of
the IRS’s proposed judgment. The Tax
Court sided with the Commissioner,
concluding that under the relevant
provisions of the tax code, Freightways,
as an accrual method taxpayer, was
required to capitalize these expenses.
Given this holding, the court declined to
reach the Commissioner’s alternative
argument that Freightways’ use of the
accrual accounting method did not fairly
reflect its income.

II

  Whether a taxpayer is required to
capitalize particular expenses is a
question of law, and our review is
therefore de novo. See Heffley v.
Commissioner, 

, 282 (7th Cir.
1989). In order to place the issues in
context, we begin by addressing the Tax
Court’s resolution of the case. The court
recognized that whether Freightways could
properly deduct its FLIP expenses in full
depends on whether they are ordinary and
necessary business expenses as defined by
I.R.C. sec. 162(a), or capital
expenditures covered by sec. 263(a).
Citing INDOPCO, Inc. v. Commissioner, 

(1992), the court explained,
accurately, that the essential reason
behind the need to distinguish between
currently deductible expenses and those
that are subject to capitalization is "to
match expenses with the revenues of the
taxable period to which they are properly
attributable, thereby resulting in a more
accurate calculation of net income for
tax 

. Some
mismatching is inevitable: it is not
necessary to count every pencil on hand
at the end of a tax year to determine
whether it will be useful in the next tax
year and, if so, to treat it as a capital
asset. The critical consideration in
determining whether an expense should be
treated as a capital expenditure is
whether the expenditure produces more
than an incidental future benefit or, as
the Treasury Regulations put it, whether
a benefit for the taxpayer extends
"substantially beyond the tax year." See,
e.g., Treas. Regs. sec.sec. 1.263(a)-2,
1.461-1(a)(2).

  This means that, but for the accident
that Freightways’ expense year does not
correspond with its tax year, there would
be no problem in treating the FLIP
expenses as current. The licenses and
fees Freightways purchased conferred a
12-month benefit on the company; if it
had incurred those expenses on January 1
of each year and they had all expired on
December 31 (the tax year for
Freightways), no one would have argued
that capitalization was required. But for
reasons unrelated to taxation, that is
not the way the FLIP expenses worked. The
Tax Court’s task was thus to unravel the
tax implications of this quirk, which
turn on the lines that must be drawn
conceptually between deductible expenses
and capital expenditures.

  Turning to the question whether
Freightways’ FLIP expenses were
deductible in full in the year they were
incurred, the Tax Court understood
Freightways to be arguing that it should
be allowed to deduct its FLIP expenses in
full under a "one-year rule" permitting
the deduction of any current expense with
a benefit that extends less than 12
months into the subsequent tax year. The
application of this principle would rid
the Commissioner’s position of its
intrinsic arbitrariness: under a one-year
rule, nothing would turn on the accident
of the date during a year when a one-year
expenditure was made. The worst case
(from the Commissioner’s standpoint) one
could imagine of a mis-match between the
year of payment and the year of benefit
would be the one in which a taxpayer
bought all its licenses on December 31 of
year 1 and deducted their entire cost in
that year, even though the entire benefit
accrued in year 2. (The worst for the
taxpayer might be a case in which the
license was purchased on February 1 of
the first year and expired on January 31
of the next year, if the Commissioner
regarded a full month as "substantial"
enough to require capitalization.) The
Tax Court rejected Freightways’ reliance
on a one-year rule for two reasons.
First, it questioned whether such rule
was, in fact, well established in the
case law. Second, it found that
Freightways had a "more fundamental
problem," namely the fact that "even if
such a 1-year rule were widely
recognized, it would be inapplicable to
an accrual method taxpayer." On these two
grounds, and without further explanation,
the court affirmed the Commissioner’s
deficiency judgment.

III

  This is a difficult case because the
language of the Code, the regulations,
and the presumption in favor of
capitalization to varying degrees support
the Commissioner’s position, but the
rationale for distinguishing between
immediate expenses that should be
deducted from a single year’s income and
longer term expenses that are suitable
for amortization strongly cuts in
Freightways’ direction. Furthermore, as
we explain below, the Tax Court’s
alternative ruling that any judge-made
"one year rule ought not logically to be
available to accrual taxpayers" is not
supportable. Because so much turns on the
degree of deference we owe to the
Commissioner in these circumstances, we
begin with a brief discussion of that
subject and then turn to the merits of
the case.

A.

  At the most general level, this case
turns on which of two provisions of the
Code itself should apply to Freightways’
situation: section 162(a), which permits
the deduction of ordinary and necessary
business expenses, or sec. 263(a), which
calls for the capitalization of all other
expenditures. The Commissioner has issued
notice-and-comment regulations that
elaborate on the way this choice should
be made. As we noted above, those
regulations provide that expenditures
producing nothing more than an
"incidental" future benefit are eligible
for current year deductions, while
expenditures whose benefits extend
"substantially" beyond the tax year must
be capitalized. See Treas. Regs. sec.sec.
1.263(a)-2, 1.461-1(a)(2). But this is
not a case where the regulations
themselves fully answer the question
before us. Instead, another layer of
interpretation has been laid on top of
the regulations: the Commissioner has
informed the courts throughout the course
of this litigation that the term
"substantially" as used in the
regulations should be interpreted to
cover anything that extends more than a
few days, or perhaps a month, into the
second tax year. This is so regardless of
the implications for the capitalization
decision of the other factors normally
used to draw the line between ordinary
and capital expenses.

  In the ordinary case, our focus is on
the deference we must give to a
regulation itself. After Mead, we know
that we give full deference under Chevron
v. Natural Resources Defense Council,
Inc., 

(1984), only to
regulations that were promulgated with
full notice-and-comment or comparable
formalities. See 

. We also know that deference to
agency positions is not an all-or-nothing
proposition; more informal agency
statements and positions receive a more
flexible respect, in which factors like
"the degree of the agency’s care, its
consistency, formality, and relative
expertness, and . . . the persuasiveness
of the agency’s position," are all
relevant. 

the typical
case where the validity of a regulation
is at issue, we have explained before
that Chevron requires us to apply a two-
step analysis:

(1) We examine the text of the statute--
in this case, the relevant section of the
tax code. If the plain meaning of the
text either supports or opposes the
regulation, then we stop our analysis and
either strike or validate the regulation.
But if we conclude the statute is either
ambiguous or silent of the issue, we
continue to the second step:

(2) We examine the reasonableness of the
regulation. If the regulation is a
reasonable reading of the statute, we
give deference to the agency’s
interpretation.

Bankers Life & Cas. Co. v. United States,

, 983 (7th Cir. 1998).

  In the present case, however, no one is
arguing that the regulations the
Commissioner has promulgated are invalid
or that they are inconsistent with the
text of the Code. The issue is instead
whether the Commissioner’s interpretation
of his own regulations is a reasonable
one. And as to that, there is no question
but that the interpretive methodologies
he has used have been informal. The
interpretation with which we are
concerned has emerged inferentially in
the way the IRS has applied the rules to
different cases and it has appeared
through the litigating positions the
Service has taken.

  Both the informality of this
interpretation and the context in which
it has arisen persuade us that full
Chevron deference is not appropriate
here. Mead expressly disapproved of the
exercise of such deference for the
customs regulations that were at issue
there, in part because of the boot-
strapping that could otherwise occur.
With full Chevron deference, agencies
could pass broad or vague regulations
through notice-and-comment procedures,
and then proceed to create rules through
ad hoc interpretations that were subject
only to limited judicial review. All
told, we think this is a clear case for
the flexible approach Mead described,
relying on the Supreme Court’s earlier
decision in Skidmore v. Swift & Co., 

(1944), and we thus proceed on
that basis.

B.

  One reason the Tax Court gave for
accepting the Commissioner’s disallowance
of Freightways’ deductions was that, even
if there is some kind of one-year rule
for deductible expenses, accrual
taxpayers are never entitled to it. This,
we conclude, is an unsustainable
position. In flatly rejecting the one-
year rule for accrual taxpayers, that
court relied largely on implications from
its own earlier decision in Johnson v.
Commissioner, 

(1997).
Johnson involved an accrual taxpayer that
had purchased various insurance policies
covering periods of one to seven years.
The Tax Court held that regardless of the
length of the policy, to the extent that
part of the premiums paid was allocable
to subsequent tax years, capitalization
and amortization was required. We think
the court read too much into Johnson, and
from a broader point of view (since we at
least are not bound by earlier Tax Court
decisions) it confuses the time when
income is generated or expenditures are
incurred (when paid or received, versus
when the rights accrue) with the length
of the economic benefit they will yield.
Although Johnson used broad language that
could be interpreted to be inconsistent
with the existence of a one-year rule, it
did not link its holding to the
taxpayer’s method of accounting.

  Moreover, Johnson relied on Commissioner
v. Boylston Market Association, 

(1st Cir. 1942), for the proposition
that "lump sum payments for multiyear
insurance coverage generally are capital
expenditures." See Johnson, 

. Boylston Market involved a cash
basis taxpayer and specifically concluded
that a taxpayer, "regardless of his
method of accounting" must capitalize a
three-year prepaid insurance policy
because it is an asset having "a longer
life than a single taxable year." 

While Boylston Market’s statement of
the one-year rule may be ambiguous, the
court clearly believed it applied to both
accrual and cash basis taxpayers. In
fact, the Tax Court commented in Johnson
that Boylston Market supported a one-year
rule for cash basis taxpayers, who,
itacknowledged, could fully deduct
insurance premiums covering a year or
less. In Freightways’ case, the Tax Court
also found support for its position in
Zaninovich v. Commissioner, 

,
(9th Cir. 1980). Zaninovich permitted a
deduction for a rental payment that
extended eleven months into the
subsequent tax year and sought to
reconcile its position with the Board of
Tax Appeals’ contrary holding in
Bloedel’s Jewelry, Inc. v. Commissioner,

(1925), by pointing out that
Bloedel’s involved an accrual method

& nn. 5-6.
This is a fairly weak reed for present
purposes, as the effort to distinguish
Bloedel’s was unnecessary in any event to
the Ninth Circuit’s decision, and that
court made no effort to think carefully
about what consequences should flow from
a taxpayer’s choice of accounting
methods.

  In our view, the decision whether to
expense or capitalize a particular item
should not turn on whether the taxpayer
uses the cash or accrual basis of
accounting. As Freightways points out,
even the Treasury Regulation on which the
Commissioner has relied here, Treas. Reg.
sec. 1.461-1(a), uses identical language
in subpart (1) (relating to cash basis
taxpayers) and in subpart (2) (relating
to accrual basis taxpayers): both must
capitalize an expenditure that results in
the creation of an asset having a useful
life which extends substantially beyond
the close of the tax year. The mere fact
that Freightways is an accrual method
taxpayer thus does not disqualify it from
expensing the short-term items at issue
here.

C.

  We turn thus to the central reason the
Commissioner, as affirmed by the Tax
Court, gave: that no matter what other
characteristics an expenditure has, if it
is made in one tax year and its useful
life extends "substantially" (an
undefined term) beyond the close of that
year, then it must be capitalized.
Perhaps this rule works in some simple
cases. It relies on an implicit spectrum
between things that are consumed
immediately and those that last well
beyond a year. Consumable office
supplies, such as paper and pens, might
not be thought to have a useful life that
will extend substantially beyond a given
year, even if they are acquired late in
the year (though it depends on the pen--
some disposable pens bought in November
might well be functioning four or five
months into the new year). Something like
computers or furniture, on the other
hand, predictably will last beyond one
tax year. The problem is that many things
fall somewhere in the middle of this
hypothetical spectrum. Some employers,
for example, pay for employee training
seminars, which surely create human
capital that lasts for many years. Are
the training expenses one-year deductible
items? Must they be capitalized? What
about a light bulb that the company
expected would last for eight months, but
turned out to be burning brightly after
14--or anything else whose useful life
was estimated at approximately a year,
but that might have failed sooner or
lasted longer? The license fees, permit
fees, and insurance premiums Freightways
pays are, in a sense, easier to
characterize as deductible expenses than
the pens or the light bulbs because the
issuing entities and insurance companies
have strictly defined the useful life of
the item to be exactly one year--not a
minute more or less. The only reason that
the FLIP expenses are also in the middle
range of the spectrum is because the
twelve-month period each one covers will
usually lap across two tax years.

  Looking at the language of Treas. Reg.
sec. 1.263(a)-2, we find two somewhat
contradictory clues. On the one hand,
there is the simple word "substantially,"
which the Commissioner seems to interpret
as meaning at least a month (or maybe
two, three, or four months?) into a
second tax year. We do not wish to
quibble about the number of months
because even Freightways appears to
concede that nine, ten, or eleven months
into a second year would qualify as
"substantially," and some of the FLIP
expenses might fit this pattern. Indeed,
"substantially" could be defined instead
as a ratio between the benefit in the
year of deduction and the subsequent tax
year. But, on the other side, Treas. Reg.
sec. 1.263(a)-2 certainly suggests that
the FLIP expenses are not similar to the
kinds of expenditures that the IRS itself
thinks must be capitalized. The most
pertinent subsection of that regulation
indicates that "[t]he cost of
acquisition, construction, or erection of
buildings, machinery and equipment,
furniture and fixtures, and similar
property having a useful life
substantially beyond the tax year" should
be capitalized. 

1.263(a)-
2(a). Followers of the interpretive maxim
expressio unius est exclusio alterius
would argue that the enumeration of items
all of which seem to have a multiple-year
life span implies that something that
will expire or wear out in exactly a year
should not be capitalized. We further
note that these examples are all of
expenses that become part of the basis of
a capital good. There is no such capital
good attached to the FLIP expenses. In
this sense, Freightways’ position is even
more compelling than that of the
petitioner in the leading case of PNC
Bancorp, Inc. v. Commissioner, 

(3d Cir. 2000). PNC Bancorp relied on
the language of sec.sec. 162(a) and
263(a) and the regulations enacted
thereunder to hold that ordinary and
necessary expenses incurred in the
origination of loans could be deducted
under sec. 162(a). It explained that
recurring, administrative expenses that
are necessary to the business activity of
the petitioner fall too far "from the
heartland of the traditional capital
expenditure (a ’permanent improvement or
betterment’)," 

to require
capitalization. That permanence is
precisely what the FLIP expenses lack.

  The regulation itself, it is evident,
does not resolve this issue one way or
the other. We turn then to the way the
IRS has applied the regulation. It is not
particularly useful in this connection to
focus on whether some kind of "one-year"
rule exists: it is clear that no such
rule has been promulgated using notice-
and-comment or other formal procedures,
and thus at most we would be deciding
whether it could be discerned in agency
practice. The Commissioner denies that
there is any such rule. Freightways, for
its part, points to numerous Revenue
Rulings, decisions of the Tax Court, and
judicial opinions in which deductions
have been allowed for expenditures whose
value is limited to twelve months, even
if two tax years are covered. See, e.g.,
Rev. Rul. 59-239, 1959-2 C.B. 55
(deduction allowed for cost of tires and
tubes with average useful life of one
year or less); Rev. Rul. 69-81, 1969-1
C.B. 137 (deduction allowed for cost of
towels, garments, and gloves with useful
life of one year or less); Mennuto v.
Commissioner, 

, 924 (1971)
(deduction allowed for costs of
installing leeching pit designed to last
for one year); Bell v. Commissioner, 

, 348 (1949) (current deduction
allowed for insurance expense where
policy covered part of 1945 and part of
1946); Encyclopedia Britannica v.
Commissioner, 

, 217 (7th Cir.
1982) (stating that a capital expenditure
is anything that yields income beyond a
period, typically one year, in which the
expenditure is made); Clark Oil and Ref.
Corp. v. United States, 

,
1219-20 (7th Cir. 1973) (also mentioning
a useful life of one year as the normal
dividing line between a capital expense
and an ordinary expense).

  The Commissioner replies, correctly in
our opinion, that none of these decisions
turned on the precise question now before
us: whether there really is a rule under
which all prepaid expenses with a useful
life of only one year, but whose benefits
extend substantially into a second tax
year, are entitled to treatment as
deductible ordinary expenses rather than
capital expenditures. Furthermore, to the
extent that we should consider statements
made in earlier decisions in the context
of the issues presented and the ultimate
holdings of the cases, it is notable that
in both Encyclopedia Britannica and in
Clark Oil this court eventually rejected
the taxpayer’s argument that certain
expenses were deductible and ruled that
they had to be capitalized. See
Encyclopedia 

;
Clark 

. Even so,
we are left with a point that cuts in
Freightways’ favor: there has been no
consistent practice on the Commissioner’s
part under which capitalization of these
expenditures has been required. Indeed,
to the extent that agency practice exists
at all, it appears that deductions have
been allowed in a substantial number of
cases.

  Persuasiveness is another factor that
Skidmore and Mead identify as important
in this kind of case. This too favors
Freightways. As the Commissioner’s own
examples in the regulation underscore,
the policy behind the distinction between
capitalization and expense tends to
support Freightways. We know from the
Supreme Court’s decision in INDOPCO that
it is difficult to draw decisive
distinctions between current expenses and
capital expenditures, because we are
often dealing with differences of degree
and not of kind. 

. We
also know that an income tax deduction is
a matter of legislative grace and thus
the burden of clearly showing the right
to the claimed deduction is on the
taxpayer. Interstate Transit Lines v.
Commissioner, 

, 593 (1943).
Deductions are the exception to the norm
of capitalization and are allowed only
as there is a clear provision therefor.

(internal
quotations and citations omitted); A.E.
Staley Mfg. Co. v. Commissioner, 

, 486 (7th Cir. 1997). If an
expenditure satisfies both the definition
of 162 and the requirements of 263,
the latter statutory provision takes
precedence and the expense must be
capitalized. Commissioner v. Idaho Power
Co., 

, 17 (1974); Fishman v.
Commissioner, 

, 312 (7th Cir.
1988). This presumption obviously favors
the Commissioner in the instant case. At
the same time, however, "the Court did
not purport to be creating a talismanic
test that an expenditure must be
capitalized if it creates some future
benefit." A.E. Staley Mfg. 

(discussing INDOPCO).

  Even the Commissioner concedes the
ordinariness of Freightways’ FLIP
expenses for companies in the trucking
business. Not only are they ordinary, but
as Freightways points out, they recur,
with clockwork regularity, every year.
Both this court and the IRS have
recognized this type of regularity as
something that tends to support a finding
of deductibility. See Encyclopedia

; Tech.
Adv. Mem. 9645002 (June 21, 1996). Recur
rent expenses are more likely to be
ordinary and necessary business expenses.
See, e.g., Tech. Adv. Mem. 7401311140A
(January 31, 1974) ("We believe the Davee
principle concerning the recurrent nature
of an expense serves as a useful basis
for distinguishing ordinary business
expenses from expenses that are in the
nature of capital expenditures,
regardless of what type of expense may be
at issue."). Because they recur every
year, there is less distorting effect on
income from future tax year benefits over
time. In every year, that is, while
Freightways will be able to reap the tax
advantage of deduction for some part of
the following twelve months, it will have
"lost" the deductions for the months
covered by the prior year’s licenses, for
which it has already received the
benefit. In a hypothetical last year of
Freightways’ corporate life, it would
finally be entitled to only a prorated
deduction for licenses (if any) that are
acquired during that year, partially
evening out the score with the first year
of deductions. Freightways argues that
this is exactly its situation: its FLIP
expenses recur annually, and it has
consistently deducted them in their
entirety.

  The Commissioner responds that some
distortion remains as long as the
expenses are not capitalized. Here, it is
undisputed that the change from expensing
to amortizing would have meant an
increase in Freightways’ 1993 tax income
of $2,984,197, which corresponded to a
tax deficiency of $1,712,070. The
Commissioner was also prepared to
introduce evidence of financial data for
years after 1993, for the purpose of
showing the distortion in income that
Freightways’ system was causing. In his
appellate brief, the Commissioner asserts
that expensing was allowing Freightways
in a sense to borrow deductions from
later years and thus to lower its tax
burdens year after year: for the years
1993 through 1997, the Commissioner
asserts, total deductions for FLIP
expenses using Freightways’ method
exceeded the amount that capitalization
would have allowed by $2,363,925. We
agree with him that the mere fact that
certain expenditures recur does not
negate the distorting effect of expensing
that predictably occurred here--the
interest-free government loan that comes
from the deduction remains the same
regardless of whether the FLIP expenses
are unchanged throughout the corporate
life of Freightways.

  But perfection is a lot to ask for, even
in the administration of the tax laws,
which we acknowledge endeavor "to match
expenses with the revenues of the taxable
period to which they are properly
attributable, thereby resulting in a more
accurate calculation of net income for
tax purposes." 

;
Rev. Rul. 95-32, 1995-1 C.B. 9. We note
again in this regard that Freightways’
pattern of FLIP expenditures had nothing
to do with tax planning; external
agencies and companies controlled the
time when its licenses, permits, and
policies had to be renewed. As such, we
do not expect its pattern of FLIP
expenditures to change based on the
outcome of this case. We find it
significant that it was not Freightways
that was manipulating the tax laws in
order to obtain the implicit loans about
which the Commissioner is concerned. It
was external realities over which the
taxpayer had no control.

  Freightways’ final point is that
perfection in temporal matching comes at
too high a price for these kinds of
expenses. At some point the
"administrative costs and conceptual
rigor" of achieving a more perfect match
become too great. Encyclopedia

. Here, there
is a considerable administrative burden
that Freightways and any similarly
situated taxpayer will bear if it must
always allocate one-year expenses to two
tax years, year in and year out. It
argues that the gain in precision for the
taxing authorities is far outweighed by
the administrative burden it will bear in
performing this task. The Commissioner
responds that, as an accrual taxpayer,
Freightways is already reflecting on its
financial accounting records precisely
the allocation the Commissioner wants for
tax purposes. But it is well known that
financial accounting and tax accounting
need not be handled in exactly the same
way. See, e.g., United States v. Hughes
Properties, Inc., 

, 603
(1986) ("Proper financial accounting and
acceptable tax acounting, to be sure, are
not the same. . . . The Court has long
recognized the vastly different
objectives that financial and tax
accounting have."). See also Peoples Bank
and Trust Co. v. Commissioner, 

, 1343 (7th Cir. 1969). The kind of
change in the company’s tax accounting
system for which the Commissioner is
arguing will impose an administrative
burden regardless of the way its
financial accounts are kept.
  We conclude that, for the particular
kind of expenses at issue in this case--
fixed, one-year items where the benefit
will never extend beyond that term, that
are ordinary, necessary, and recurring
expenses for the business in question--
the balance of factors under the statute
and regulations cuts in favor of treating
them as deductible expenses under I.R.C.
sec. 162(a). We therefore reverse the Tax
Court’s ruling to the contrary.

IV

  One final point remains to be decided.
The Commissioner argued before the Tax
Court that Freightways’ method of
accounting did not clearly reflect its
income. When the Commissioner has made
such a determination, he can require
computation of taxable income under an
alternative method that will accurately
reflect income. I.R.C. sec. 446(b). See
Hughes 

.
Freightways concedes that the Tax Court
did not reach this point, but it urges
that we should decide as a matter of law
that its method of accounting did clearly
reflect its income. The Commissioner,
however, possesses broad discretion in
this area, and we are reluctant to decide
the case as a matter of law on the state
of the record as it now stands. We will
instead remand the case to the Tax Court
for the limited purpose of considering
this alternative ground for the
Commissioner’s decision.

  The judgment of the Tax Court is
Reversed, and the case is Remanded to the
Tax Court for further proceedings
consistent with this opinion.