Document: 372 U.S. 128 83 S.Ct. 601 9 L.Ed.2d 633 Mark E. SCHLUDE et al., Petitioners,v.COMMISSIONER OF INTERNAL REVENUE. No. 80. Argued Dec. 10, 1962. Decided Feb. 18, 1963. Carl F. Bauersfeld, Washington, D.C., for petitioners. Louis Oberdorfer, respondent. Mr. Justice WHITE delivered the opinion of Court. 1 This is still another chapter in protracted problem time certain items are to be recognized as income purposes federal tax. The commissioner Internal Revenue increased 1952, 1953 and 1954 ordinary taxpayers1 by including gross those years amounts received or receivable under contracts executed during despite fact that obligated taxpayers render performance subsequent periods. These increases produced tax deficiencies which unsuccessfully challenged Tax Court on ground could deferred their accounting method. On appeal, Appeals Eighth Circuit agreed with reversed Court, 283 F.2d 234, decision having been rendered prior ours American Automobile Ass'n v. United States, 367 687, 81 1727, 6 1109. Following Association case, certiorari this case was granted, judgment lower court vacated, 911, 1915, 1248, cause remanded further consideration light Association. 368 873, 82 25, 7 72. In a per curiam opinion, held view Association, taxpayers' method 'does not, purposes, clearly reflect income' affirmed Commissioner, 296 721. We brought back once again consider whether misapprehended scope 370 902, 8 399. 2 Taxpayers, husband wife, formed partnership operate ballroom dancing studios (collectively referred 'studio') pursuant Arthur Murray, Inc., franchise agreements. Dancing lessons were offered either two basic contracts. cash plan contract required student pay entire down payment at balance due installments thereafter. only portion paid cash. remainder stated price designated negotiable note signed executed. 3 Both types provided (1) should tuition amount, (2) not relieved his obligation tuition, (3) no refunds would made, (4) noncancelable.2 prescribed specific number lesson hours ranging from five 1,200 some lifetime courses entitling additionally permonth plus parties year life. Although period had taken, there schedule dates, arranged given. 4 Cash payments directly students when notes discounted bank fully paid3 deposited studio's general account without segregation its other funds. agreements studio weekly basis, 10% these receipts royalty 5% escrow, latter continue until $20,000 indemnity fund accumulated. Similarly, sales commissions sold account. 5 studio, since inception 1946, has kept books reported purposes4 an accrual system accounting. addition books, individual record cards maintained showing taught remaining contract. system, substance, operated follows. When entered into, 'deferred credited total price. At close each fiscal period, analyzed multiplied rate hour resulting sum deducted earned financial statements return. addition, if activity over year, course reduced entry made canceling untaught contract, removing amount account, recognizing gain extent exceeded i.e., advance. representing gains cancellations constituted chief sources partnership's income.5 carried forward into next decreased accordance new contracts, recognized. Deductions also basis except irrespective related taken income. Three certified public accountants testified employed truly reflected net commercial standards. Commissioner included question advance but full face respective years. upheld States retreated somewhat does now claim includibility future evidenced neither terms nor matured services.6 decision, then, this: Was it proper exercising discretion § 41,7 1939 Code, 446(b),8 reject reflecting include particular way cash, falling unpaid year? hold we believe squarely controlled occasion legislative background treatment prepaid retroactive repeal 452 'the law incontestably permitting practice upon (the taxpayer) depends,' regarded reinstating long-standing administrative rulings systems deferring rejected Commissioner. '(T)he first specifically declared petitioner's acceptable overruled position courts contrary. And section following insistence Treasury proposed endorsement such have disastrous impact Government's revenue, just mandate Congress purposes.' U.S., 695, 1731. 10 Confirming step-by-step approach granting deferral privilege limited groups while exploring more deeply ramifications problem. 11 Plainly, considerations expressed apposite here. need add here provision extending membership corporations enacted, 456, added 1, Act July 26, 1961, 75 Stat. 222, continuing, least so far, congressional policy treating precise provisions narrow applicability. Consequently, invoke 'longestablished deferring, where possible, procedures field,' and, cannot say Commissioner's rejection unsound. 12 rested additional controlling Relying Club Michigan 353 180, 77 707, 746, taxpayer's artificial services performed customers' demands relation fixed dates future. suffers very same vice, sought defer did provide after taxable left instructor student. Under arrange all simply allow rights lapse. But even though demand lessons, permitted insist obligations undertaken retain whatever prepayments restriction use refund. end meticulously reflected, uncertain none, rendered. Clearly, solely fashion cases.9 13 Moreover, percentage royalties sold, transactions bank, deferred, part, later circumstances, vulnerable 41 446(b) respect justified note10 received. If includible receipt because allocation income, likewise claims, they become payable. For taxpayer 'it right receive actual determines inclusion income,' Spring City Foundry Co. 292 182, 184, 54 644, 645, 78 L.Ed. 1200; Hansen, 360 446, 79 1270, 1360, 14 affirm insofar receipts, Because concession, reverse part yet payable periods remand directions return redetermination opinion. It ordered. 15 Affirmed directions. 16 STEWART, whom DOUGLAS, HARLAN, GOLDBERG join, dissenting. 17 As notes, most recent episode dispute concerning advances who rather than basis. Government consistently argued receipt, relying alternative arguments: claimed violate 'annual accounting' principle requires postponed one long-term economic result transaction. Alternatively, must 'claim-of-right doctrine,' otherwise reportable use, funds may disputed.1 18 I elsewhere pointed out, doctrines any relevance derived accrual-basis taxpayer.2 elementary principles require considered rendition made. theories force accrualbasis disregard statute explicitly authorizes returns based sound methods.3 19 Apparently agrees annual requirement claim-of-right doctrine applicability involved case. base theory, rather, previous cases,4 used 'clearly accord statutory command.5 said compelled both history analysis employed. 20 reasons length,6 rely §§ 462 indicating disapproval conspicuously clear evidence intent. Secretary Treasury, sections, inference drawn sections.7 So Senate Report.8 sections occasioned fear temporary revenue losses taking 'double deductions' transition previously basis.9 21 Court's can justified, command 41. case10 allocated yearly dues ratably months, year. absence proof demanded members distributed proportion case11 statistical show proration reasonably matched costs incurred month rendering attributable dues. validity timing wholly within control thought therefore, estimate accuracy member's demands. 22 present difficulties perceived entirely eliminated records accurately measured rendered—and therefore taxpayer—under But, told, fatal flaw accounts too: 'for * *, student.' Yet 'fixed date performance' standard, turns actually nothing do aspects ultimately finds objectionable. 23 There indicate recorded. contrary, admittedly accurate recording given connection 'uncertain some, all' contractual rendered, condemned 'arbitrariness' recognized.12 is, course, true businesses simultaneously necessarily unknown surely contended specified times make how many demand. Indeed, suggest fixing would, embodied suffice petitioners' income.' 24 Instead, cure suggested defect estimated agree estimates might taxpayers. precisely type evaluations struck Whatever artificialities exigencies collection field accounting, never before today consistent valid equally says taxpayers, which, impermissible. 25 seems me third trilogy cases purportedly decided own peculiar facts, truth completes mutilation element reporting income—a approved almost half century.13 26 respectfully dissent. controversy equal partners. Since entity, partners being liable capacities distributive share 181, Int.Rev.Code 1939; 701, 1954, statement affects liabilities individually. However, convenience discussion will center mention effect noncancelable, frequently rewrote reducing smaller money. Also, discouraged refunds, occasionally refund canceled Notes ordinarily transferred, recourse, local deduct interest charges credit approximately 50% amount. reserve unavailable paid, reserved transferred Though prepare file information showing, inter alia, allowable deductions. 187, Code; 6031, Code. reflects returns: Gross income: Contract to. 1952 income... $143,949.63. $243,277.46 $325,266.97 Gains cancellation. 26,861.40. 19,483.36 28,488.61 Other income....... 4,041.21. 11,426.23 16,987.31 Total...........174,852.24.274,187.05 370,702.89 Deductions...........137,267.91.223,390.69 301,609.76 Ordinary 37,584.33. 50,796.36 69,093.13 'Upon reconsideration, however, concede error accruing matter services. Studio's collect installment depends continuing ability willingness perform. Until time, ripened.' Brief p. 67. '§ General rule 'The shall computed (fiscal calendar be) regularly keeping taxpayer; employed, computation defined 48 keep year.' 446. methods '(a) rule.—Taxable computes books. '(b) Exceptions.—If taxpayer, as, delegate, '(c) Permissible methods.—Subject subsections (a) (b), compute accounting— '(1) disbursements method; '(2) '(3) chapter; '(4) combination foregoing regulations delegate.' 'gains cancellations' underlines aspect gains, promised given, arbitrarily deemed canceled. attempt report choosing instead bearing relationship Cf. Continental Tie & Lumber 286 290, 52 529, 76 1111. Negotiable equivalent fair market value, recognition 39.22(a)—4, Treas.Reg. 118, 1.61—2(d)(4), Treas.Reg., Mertens, Federal Income Taxation (1961), 11.07. See Pinellas Ice Cold Storage 287 462, 53 257, 428. sometimes successful urging doctrine' bar e.g., Andrews T.C. 1026, 1032—1033; South Dade Farms 138 818 (C.A.5th Cir.); Clay Sewer Pipe 139 130 (C.A.3d 230 585, 591 (C.A.6th Cir.), aff'd grounds, 746. cases, hand, Courts irrelevant Bressner Radio, Inc. 267 520, 524, 525—528 (C.A.2d Schuessler 722, 725 Beacon Publishing 218 697, 699—701 (C.A.10th Cir.). urged applicable fees he receded reached accepted argument. Your Health Club, 385. 699—702, 1733—1735, 1109 (dissenting opinion). *.' 3, supra. 41, 703—711, 1735—1739 H.R.Rep.No.293, 84th Cong., 1st Sess. 5. S.Rep.No.372, 5—6. H.R.R.ep.No.293, 4—5, U.S.Code Congressional Administrative News 1955, 2046. advantage deduction' repealed sections. urges personnel inconsistent system. noted 1.461—1(a)(3), provides: '* going business overlapping materially distort takes them account.' If, holding 'materially then recomputation items. 13(d) 1916, 39 771.

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