Document: 367 U.S. 687 81 S.Ct. 1727 6 L.Ed.2d 1109 AMERICAN AUTOMOBILE ASSOCIATION, Petitioner,v.UNITED STATES. No. 288. Argued April 17, 1961. Decided June 19, Rehearing Denied Oct. 9, See 82 24. Mr. Fleming Bomar, Washington, D.C., for petitioner. Louis F. Oberdorfer, respondent. Justice CLARK delivered the opinion of Court. 1 In this suit refund o federal income taxes petitioner, American Automobile Association, seeks determination its tax liability years 1952 and 1953. Returns filed taxable calendar were prepared on basis same accrual method accounting as was used in keeping books. The Association reported gross only that portion total prepaid annual membership dues, actually received or collected year, which ratably corresponded with number months covered by those dues occurring within year. balance reserved ratable monthly over remaining period following year deferred unearned reflecting an estimated future service expense to members. Commissioner contends petitioner should have each entire amount without regard expected subsequent sole point at issue, therefore, is what are income. 2 auditing Association's returns through 1954, Commissioner, exercise his discretion under § 41 Internal Revenue Code 1939,1 determined not accept taxpayer's system. As a result, adjustments made principally adding had but recognized income, subtracting from amounts although prior A net operating loss claimed 1954 corresponding carryback deductions greatly reduced, deficiencies assessed Petitioner paid timely claim denied. Suit recover instituted Court Claims, court sustained 181 F.Supp. 255. Recognizing conflict between decision below Bressner Radio, Inc., v. Cir., 267 F.2d 520, we granted certiorari. 364 813, 69, 5 L.Ed. 45. We concluded purposes must be included their actual receipt. 3 national automobile club organized nonstock corporation principal office D.C. It provides variety services2 members affiliated local clubs ten taxpayer itself directly operates divisions, such services rendered solely upon member's demand. Its derived primarily one advance clubs. Memberships may commence renewed any month For many years, association has employed admitted accord generally accepted commercial principles received, deposited bank accounts restriction use corporate purposes. However, own purposes, treated books ratably3 12-month period. portions thereof attributb le beyond receipt, i.e., second reflected close first Certain expenses chargeable cost deducted periods time 4 Claims bottomed Club Michigan 1957, 353 180, 77 707, 746, finding 'the treatment (by here was,) * Federal 'purely artificial." 255, 258. case 'a rejection Supreme advanced plaintiff bar.' Ibid. does deny system substantially identical Michigan. maintains, however, control because difference proof, record contains expert testimony indicating principles; proof member detailed; correlation credited shown justified experience. holding Michigan, artificial' based 'substantially all performed demand performance related fixed dates after year.' 189, note 20, 713. That also true here.4 testified: 'You dealing group pool. Any pooling risk situation, particular require very little specific certain other I wouldn't know experience would be, think it rather irregular individual am buying availability services, protection *. Frankly, irregularity furnishing maps helping you out when run gasoline so on, frankly don't blessed thing do over-all accounting.' accountant incidence serving exchange inconsequential, or, viewpoint accounting, unessential disclosure th overall financial condition Association. 'irregularity,' highly relevant clarity defers earned no, some, rendered. exacts revenue which, no disputes, constitute When receipt two correspondingly justification, consistently experience, doubtless presents accurate image structure, fails respect criteria rejected Commissioner. 7 further findings support position. not. Claims' follows: 8 '22. during issue been regularly since 1931 practices was, adverse Revenue, customarily motor field.' This say performing function business 'is practices.' hold clearly reflects binding Treasury.5 Likewise, merely statistical computations average per pool determinate significance our cannot, legislative consent objection depend rendering turning profit. Indeed, tabulations themselves demonstrate inadequacy standpoint pro rata allocating year's equal installments fact incurred. Not did individually incurred vary month, even varied—recognition nonetheless constant. Although seem indicate produce result recognition employed, consider similarly unsatisfactory, standpoint, allocation extent expenditures computed basis. addition, election change formula6 treats one-half half payment, more indicates artificiality method, least far controlling concerned. Moreover, realized alone sufficient petition rehearing below, specifically asked they amended enlarged, especially 22 set above. amendment 9 Whether Court's judgment controls disposition case, there considerations requiring affirmance. They concern action Congress positive ande xpress statutory authorization employment sound reporting found dissatisfaction 'as decisions rulings, developed divergencies computation principles. areas confined almost entirely questions types taken into account arriving income.' House Ways Means Committee Report, H.R.Rep.No.1337, 83d Cong., 2d Sess. 48, U.S.Code Cong. Adm.News p. 4073. introduced 452 462,7 permitted essentially practice here.8 Only later, 1955, repealed these sections retroactively. appears overruled long administrative holdings courts disallowing deferral then reversed action. repeal, believe, confirms view could While 'intend disturb law affected permissible provisions purposes,' H.R.Rep. 293, 84th 1st 4—5, cold incontestably permitting depends. To that, taxpayers using systems, declaring existing adopted restoring unaffected new section 1955 good reason, contradiction itself, 'varnishing nonsense charm sound.' Instead constituting duplicative creation, declared petitioner's acceptable long-standing position contrary. And repeal insistence Treasury proposed endorsement disastrous impact Government's revenue, just mandate interpret careful consideration problem otherwise accuse engaging sciamachy. confirmed recent 1958, supra. 4559 added 1954. permits publishers defer subscriptions newspapers, magazines periodicals. An effort Senate add provision 455 extend coverage dues.10 conference Conferees refused amendment. Senator Byrd explained (104 Cong.Rec., Part 14, 17744): 10 'It conferees matter fees nonprofit organizations part subject left study problem. *'11 11 appears, pending study, given denied relief 12 recapitulate, aware presents. enacted 462, quickly them. Since authorized desired instance subscription pointed 'publication 712. enlarge include dues. At least, background congressional complications inherent seriousness general revenue. leave fashioning rule event, wide ramifications. Committees standing committees expertly grounded problems, jurisdiction covering whole field taxation facilities studying policy various necessities revenues. validity long-established deferring, where possible, procedures indicated case.12 Finding light authorizing it, Commissioner's rejecting unsound, need anticipate will product 'study problem.' 13 Affirmed. 14 STEWART, whom DOUGLAS, HARLAN WHITTAKER join, dissenting. 15 artificial,' showed. page Here, contrast, proved, found, issu practice, similar taxpayers, and, qualified experts field, understand today either findings.1 16 thus holds disregard override direct relation costs contracts. effect allow prevent making accordance valid excluding advances until right rendition made. permit this, think, ignore clear command allowed make income.2 afraid, engender far-reaching confusion injustice administration Laws.3 I. 17 basic argument against prepayments traditionally conflicts series establish so-called 'claim doctrine.'4 Government abandoned argument, reason. four Circuits correctly held, doctrine furnishes 524, 525—528; Schlude 283 234; Schuessler 230 722, 725; Beacon Publishing Co. 218 697, 699—701.5 'restriction use' crucial factor determining funds includable North Oil Consolidated . Burnet, 286 417, 52 613, 76 1197; United States Lewis, 340 590, 71 522, 95 560; Healy 345 278, 73 671, 97 1007. But hardly follows necessarily whether earned. 18 shifted contention 'annual requirement' demands '(n)either nor deduction items accelerated postponed another order reflect long-term economic transaction transactions.' finds cases Security Flour Mills 321 281, 64 596, 88 Brown Helvering, 291 193, 54 356, 78 Burnet Sanford & Brooks Co., 282 359, 51 150, 75 383; Guaranty Trust 303 493, 58 673, 975; Heiner Mellon, 304 271, 926, 1337. 19 base theory, presumably believes, do, theory valid. Putting side relied involved cash taxpayers,6 pertain totally receipts than decisions. These cases, like start premise question fully earned.7 underlying requirement reportable cannot excluded let wait see later how turns out.8 case. payments performance. 20 wisely arguments, decides grounds me equally invalid. can find nothing history alternatively relies seems examination singularly unconvincing. 21 offer show rate fulfilled obligations simply showing carrying Until today, held absence proration reasonably matched earning proration. thinking decided realistic identifiable permissible. Inc. 526—529.9 Such concededly adduced enactment places much reliance, are, outset, obvious difficulties relying happened ascertain meaning 1939 Code. Fogarty States, 8, 13—14, 5, 10; Gemsco, Walling, 324 244, 265, 65 605, 617, 89 921; Cammarano 358 498, 510, 79 531, 462. problems aside, 462 give indication Congressional approval If anything, leads contrary impression. 23 passed revision internal laws Section inclusion i earned.10 Most significantly, shift anticipated expenses, aimed advances.11 bring '(t)ax nearly line allowing taxed reserves established known expenses.'12 24 seeking accomplish objective, 'court rulings,' approach 'subject free unrestricted though goods provided time.' 1337, A159, pp. 4073, 4297.13 awareness judicial misapplication f imply it. '(i) t difficulty lay, statute, trative interpretation.'14 while reports contain express interpretation language explaining certainly disapproval.15 25 shortlived, shape decisional changed considerably interval passage sections. 699, Tenth Circuit reliance rationale deferment 'clearly income' 41. about Ninth sale offset shipping goods. Pacific Grape Products 219 862. 26 shows complete reversal previous counterpart Code, 446. intent possibility clear—the trend course inference disapproval being drawn evidenced assurances demanded Secretary Treasury, who sought letter Chairman Committee, stated: 27 'My dear Chairman: confirm statements representatives. 28 'Furthermore, Department proper code. words, considered acceptance (218 C.A. 10, 1955) 29 my understanding foregoing consistent desire your committee, agree, operate reestablish applicable if never enacted.' 5. (Emphasis supplied.) 30 expressed 31 'Another aspect uncertainty arises circuit Company (C.C.A.10th, January 3, 1955). accounting. previously referred he sent chairman Treassury He accp tance 32 'Uncertainty exist provisions. (C.C.A.9th, February 1955), example, freight end accrued extension laid down might well lead most repealed.' S.Rep. 372, 5—6, 2050.16 33 mind, every dissuade doing exactly case—drawing advances.17 hazy, conclusion reached purpose repealing Cf. Benedict, 338 692, 696, 70 472, 475, 94 478. is, impression opinion, reasons accepting this. Sections prospective take advantage sections.18 Insofar concerned, occurred consequence changing reporting, necessity securing consent, 462.19 commonly termed 'double deduction' transitional year.20 Under attributable Similarly, 452, pre-payments transition current past still deductible.21 34 maintenance revenues—does not, who, payments. No involved, possible. formerly now Treas.Reg. 111, 29.41 (1943); 118, 39.41—2(c) (1953); Int.Rev.Code 446(e).22 Before giving insist forestall method. Kahuku Plantation 132 674; Mertens, Law Income Taxation, §§ 12.21, 12.21a. 204, 361, 725. 35 short, indicate, does, bearing income,' conclusion. activity cited way alters Contrary suggestion, 'relief Court' short 1958 urging extended enacted, limited application I.T. 3369, 1940—1 Cum.Bull. 46. applied U.S.C. 455(c)(3) (B), U.S.C.A. 455(c)(3)(B). II. 36 odds statutes,23 regulations,24 decision,25 1916, correct, 'discretion system.' 37 concept including approval. have, often soon obligation pay becomes 'certain.' See, e.g., Anderson, 269 422, 46 131, 347; National 274 99, 47 946; Niles Bement Pond 281 357, 360, 50 251, 252, 74 901; Olympic Radio Television, 349 232, 236, 733, 99 1024. before payment made,26 due.27 flow cash, 'economic bookkeeping' supra, 441, 134. foundation 'all events' test deductions. 134;28 Edison 366 380, 384—386, 1326, 1329—1330, 356. Continental Tie Lumber 290, 529, 1111. noted, '(i)t necessary corollary proposition' Anderson rested occurred, both performance, occur discharge perform (the taxpayer) return receipt.' 524. 440, 134; 699. 'accrual' defined terms 'earnings' services. Spring City Foundry 292 182, 184—185, 644, 645, 1200; Stanley Kilcullen, Tax (3d ed. 190.29 advances, Court, disregards 38 compelling force utilize hybrid method—a items. 234, 239. South Texas 333 496, 501, 68 695, 698, 92 831. enforcement distortion particularly last business. On report unrealistically high receipts, offsetting receipts. returns, partially years. Even then, forbidden correlate earnings expenditures, normal fluctuations low fewer preceding inflated adjusted Finally, decide go fulfillment contractual already undertaken, final grossly unrealistic loss. 39 suggests earnings, estimate, turn, average, individual, costs. true, course, Accordingly, outstanding discharged (and hence period), compare full contract term. estimates averages inconsistent long-accepted 40 litigation, 'many concerns keep estimate transactions undoubtedly allocable 295—296, requires here. Harrold 192 1002; 722; Denise Coal 271 930, 934 937; Hilinski 237 703. noted regulations Codes methods estimates.30 faulty, forbid standard ground determine be. 'defers rendered.' provide, constant readiness needed, certainty Averages frequently utilized reporting. computing value work process, distributing overhead cost, areas, accepted. Rookwood Pottery 45 43; Eatonville B.T.A. 232. 'average cost' appropriate continuously available. composite figures. 42 original therefore authority reversed. 'net shall *.' 53 Stat. 24, (1952 ed.) 41, (1958 446, road maps, routing, tour books, etc.; emergency contracts garages; bail bond protection; personal accident insurance theft some license procurement, brake headlight adjustment service, notarial duties advice prosecution small claims. 1953 accounted one-twenty-fourth (on assumption mean date middle month), one-twelfth next eleven months, again anniversary month. guided reach charging deferring distinguished present them distinguishable Hearing 'method years.' court, adopt finding. 2, ed., Supp. II) repealed, 69 134 (1955). Report language: 'Under regardless includible recipient 1622, 301, 4940. 455, 455. unsuccessful attempt inducec ongressional H.R. 11266, 86th Sess., August 1960, 106 Cong.Rec. 17482, failed draw adjournment. bill currently pending, 929, 87th 381 accompanying recommending passage. measure 'shall deemed required rendered, privileges available.' added.) Eighty-fourth started 'legislation 6, 2051. excess billion dollars. 3. continues important observation 'transitional rule' 'to minimize initial impact' pending. 381, 4. perhaps, presently uncommon Term several involving systems challenge Claims: 'Had recognized, assigned transferred proportion servicing instead herein employed.' 1939, scope illustrated cases. Dade Farms 138 818 (rent advance); Clay Sewer Pipe Ass'n 139 130 (subscriptions promotion campaign consummated receipt); 697 (advance newspaper payments); 520 television contract); 234 (fees dancing lessons Moritz T.C. 622 ('customers' deposits' undeveloped photographs); Tacoma Motor 411 (proceeds coupons entitling bearer garage years); Your Health Club, 385 gym facilities); Northern Illinois College Optometry C H Tas Ct.Mem. 664 (tuition advance). Almost sustaining disallowance doctrine. Andrews 1026, 1032—1033; (but 722); 130; 585, 591, affirmed grounds, 746. carried due yet paid. 385. applicability enthusiastically approved legal commentators. Gelfand, 'Claim Right' Doctrine, Taxes 726; Wolder, Deduction Reserves Future Expenses Deferring Prepaid Income, 524; Note, 59 Col.L.Rev. 942, 946. cf. Freeman, Accrual Accounting Contested Items, 56 Mich.L.Rev. 727, 730—732, 747. 383. latter took special notice 'attempted avail itself' 'expenses another.' 366, 152. 725, attempting described divided properly denominated 287, 599. generally, assertion 'overriding commissions' constituted said 'wide discretion.' 361. discussion 525—526. With possible exception contingent accurately measured. 200-201, relies. partnerships formed liquidate corporations attempted partnerships' liquidation enterprise profitable. postponement barred principle. reopen deduct subsequently Again principle denying claim. Hoffman, Treatment Counts Determining Net Taxable 918, Behren, Income-Accounting Concepts Law, L.Rev. 343, 359 360; 67 Yale L.J. 1425, 1439—1440. There restrictions deferred, Proposed 1.452, Fed.Reg. 515; Bierman Helstein, Estimated 83, 93—96. envisage 48. 2. 'In (in secretary delegate) reasonable addition reserve 462(a), 68A 158. 'Estimated expense' '(A) year; (B) effect; (C) delegate satisfied accuracy.' 462(d)(1), 103—113. (quoting recommendation Presidential budget message 1954), 2048. exceptions rigid recognized. (permitting followed practice); 2080, III—2 48 (1924) sales tickets tourist cruises), Airlines, 159. Veenstra DeHaan 964; Summit 983. 729, n. 9. 84. 'Present employedb y taxpayer, state ordinarily regarded Nevertheless, *' 4—5. arguments pressed Government. Brief Respondent, 62—65, 2—5; 4—5; Hearings Finance 4725, 6. times million. 1432, 25. expanded vacation advances. 9; Sporrer, Past Reserving Expenses, 45, 55—56; Griswold, Taxation (5th 1960), 497—498. 4; 7, Dakin, Change Cash Purposes—Pyramided Double Deductions Talk, Nw.U.L.Rev. 515, —538; 497—498; 1430. one-tenth 452. 21. 1.446—1(e)(2) (1957); 204—205, Advertisers Exchange, 1086; 12.19—12.20. Act 1913, 114, strict disbursements IIB, 167. 1916 Act, revised provide that: 'A disbursements, unless may, kept, 13(d), 771. 8(g), 763 (identical individuals). designed 922, 64th 439—4 1, 133—134, 347. 1918, obtaining permission omitted, 212(b), 1064—1065, remained thirty-six 24; Reubel 676, 677—678. pertinent changed, mention 'accrual method.' May, Accountant Administration 377, 380—382. T.D. 2433, Treas.Dec. (1917); Art. 23, 111 (1920); 39.41 1.446—1 (1957). Aluminum Castings Routzahn, 92, 11, Weed Brothers 935, 938—940, Ct.Cl. 246, 251—257. Compare, (deduction disbursement) Shelby Salesbook 104 (dedc tion year). 234. profits levied. accrue 1917. technical sense argued due; assessment tax, events fix respect, ascertaining period, munitions stand different footing appearing appellee's bookkeeping statute accrued. 13(d) makes words 'accrue' income—which precisely insisted government.' authors state: ordinary precedes receive. earned, accrual.' 1111; Georgia School-Book Depository, 463; 1961 C.C.H.Tax Reporter 2820.025 ('On basis, earned'); 728. 29.42—4 (1943), 39.42—4 (1953), 1.451—3 (1957) (providing percentage completion contracts); 29.42—5 39.42—5 1.451—4 duduction redemption trading stamps 'The rate, percentage, redeemed bear issued year'). Williamson Tobacco Corp. 432.

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