Download Schlude v. Commissioner, 372 US 128

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Schlude v. Commissioner, 372 U.S. 128 (1963)
© Steven J. Willis 2006
1
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
© Steven J. Willis 2006
2
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
© Steven J. Willis 2006
3
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
Note this applies to accrual taxpayers .
. . not to those using other methods of
accounting, such as the cash method.
© Steven J. Willis 2006
4
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
Note this applies to income of accrual
taxpayers . . . not to deductions (which
are subject to a very different rule
under section 461(h).
© Steven J. Willis 2006
5
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
Note this applies to income of accrual
taxpayers . . . not to deductions (which
are subject to a very different rule
under section 461(h).
© Steven J. Willis 2006
6
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
While income is subject to an “earlier
of” test . . . deductions are subject to
a “later of” test!
© Steven J. Willis 2006
7
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
While income is subject to an “earlier
of” test . . . deductions are subject to
a “later of” test!
© Steven J. Willis 2006
8
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
© Steven J. Willis 2006
9
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
This means the amounts are due,
but not yet paid or earned.
© Steven J. Willis 2006
10
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
© Steven J. Willis 2006
11
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
This means the amounts are paid,
but not yet earned.
© Steven J. Willis 2006
12
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
Be events”
careful on
the
•The date the income is earned under the traditional “all
test.
meaning of paid. It
can include actual
receipt or receipt
of a cash
This means the amounts are paid,
equivalent.
but not yet earned.
© Steven J. Willis 2006
13
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
Be events”
careful on
the
•The date the income is earned under the traditional “all
test.
meaning of paid. It
can include actual
receipt or receipt
of a cash
This means the amounts are paid,
equivalent.
but not yet earned.
© Steven J. Willis 2006
14
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
Be events”
careful on
the
•The date the income is earned under the traditional “all
test.
meaning of paid. It
can include actual
receipt or receipt
of a cash
This means the amounts are paid,
equivalent.
but not yet earned.
© Steven J. Willis 2006
15
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
Be events”
careful on
the
•The date the income is earned under the traditional “all
test.
meaning of paid. It
can include actual
receipt or receipt
of a cash
This means the amounts are paid,
equivalent.
but not yet earned.
But, it does not include receipt of a mere deposit. See, Comm’r v. Indianapolis
Power & Light Co., 493 U.S. 203 (1990).
© Steven J. Willis 2006
16
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
Be events”
careful on
the
•The date the income is earned under the traditional “all
test.
meaning of paid. It
can include actual
receipt or receipt
This is also
of a cash
a Top 100
This means the amounts are paid,
equivalent.
case.
but not yet earned.
But, it does not include receipt of a mere deposit. See, Comm’r v. Indianapolis
Power & Light Co., 493 U.S. 203 (1990).
© Steven J. Willis 2006
17
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
© Steven J. Willis 2006
18
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
This means the amounts are
earned, but not yet due or paid.
© Steven J. Willis 2006
19
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
A taxpayer must include an amount when all
events have occurred such that the taxpayer
has a right to the item and the amount thereof
can be determined with reasonable accuracy.
© Steven J. Willis 2006
20
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
A taxpayer must include an amount when all
events have occurred such that the taxpayer
has a right to the item and the amount thereof
can be determined with reasonable accuracy.
© Steven J. Willis 2006
21
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
A taxpayer must include an amount when all
events have occurred such that the taxpayer
has a right to the item and the amount thereof
can be determined with reasonable accuracy.
© Steven J. Willis 2006
22
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
This is also the test
under generally
accepted accounting
principles [GAAP].
© Steven J. Willis 2006
A taxpayer must include an amount when all
events have occurred such that the taxpayer
has a right to the item and the amount
thereof can be determined with reasonable
accuracy.
23
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
This term is on
the Top 100
terms list.
•The date the income is earned under the traditional “all events” test.
This is also the test
under generally
accepted accounting
principles [GAAP].
© Steven J. Willis 2006
A taxpayer must include an amount when all
events have occurred such that the taxpayer
has a right to the item and the amount
thereof can be determined with reasonable
accuracy.
24
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
An accrual taxpayer must include income from the performance of
services at the earliest of three dates:
•The date an amount is due for the services.
•The date an amount is paid for the services.
•The date the income is earned under the traditional “all events” test.
This is also the test
under generally
A taxpayer must include an amount when all
events have occurred such that the taxpayer
accepted accounting
has a right to the item and the amount
principles [GAAP].
thereof can be determined with reasonable
This term is on
accuracy.
the Top 100
terms list.
© Steven J. Willis 2006
25
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
© Steven J. Willis 2006
26
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
© Steven J. Willis 2006
27
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
© Steven J. Willis 2006
28
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
© Steven J. Willis 2006
29
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
Each supports the
earlier of test for
accrual of income.
© Steven J. Willis 2006
30
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
Only a few cases have distinguished the
doctrine:
Each supports the
earlier of test for
accrual of income.
Artnell Co. v. Comm’r, 400 F.2d 981 (7th Cir. 1968).
Boise Cascade Corp. v. U. S., 530 F.2d 1367 (Ct. Cl.
1976).
Collegiate Cap & Gown Co. v. Comm’r, 37 T.C.M. 960
(1978) (CCH).
Automated Marketing System, Inc. v. United States,
34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist.
LEXIS 8553.
© Steven J. Willis 2006
31
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
Only a few cases have distinguished the
doctrine:
Each supports the
earlier of test for
accrual of income.
Artnell Co. v. Comm’r, 400 F.2d 981 (7th Cir. 1968).
Boise Cascade Corp. v. U. S., 530 F.2d 1367 (Ct. Cl.
1976).
Collegiate Cap & Gown Co. v. Comm’r, 37 T.C.M. 960
(1978) (CCH).
Automated Marketing System, Inc. v. United States,
34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist.
LEXIS 8553.
© Steven J. Willis 2006
32
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
Only a few cases have distinguished the
doctrine:
Each supports the
earlier of test for
accrual of income.
Artnell Co. v. Comm’r, 400 F.2d 981 (7th Cir. 1968).
Boise Cascade Corp. v. U. S., 530 F.2d 1367 (Ct. Cl.
1976).
Collegiate Cap & Gown Co. v. Comm’r, 37 T.C.M. 960
(1978) (CCH).
Automated Marketing System, Inc. v. United States,
34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist.
LEXIS 8553.
© Steven J. Willis 2006
33
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
Only a few cases have distinguished the
doctrine:
Each supports the
earlier of test for
accrual of income.
Artnell Co. v. Comm’r, 400 F.2d 981 (7th Cir. 1968).
Boise Cascade Corp. v. U. S., 530 F.2d 1367 (Ct. Cl.
1976).
Collegiate Cap & Gown Co. v. Comm’r, 37 T.C.M. 960
(1978) (CCH).
Automated Marketing System, Inc. v. United States,
34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist.
LEXIS 8553.
© Steven J. Willis 2006
34
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
Only a few cases have distinguished the
doctrine:
Each supports the
earlier of test for
accrual of income.
Artnell Co. v. Comm’r, 400 F.2d 981 (7th Cir. 1968).
Boise Cascade Corp. v. U. S., 530 F.2d 1367 (Ct. Cl.
1976).
Collegiate Cap & Gown Co. v. Comm’r, 37 T.C.M. 960
(1978) (CCH).
Automated Marketing System, Inc. v. United States,
34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist.
LEXIS 8553.
© Steven J. Willis 2006
35
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
Only a few cases have distinguished the
doctrine:
Each supports the
earlier of test for
accrual of income.
Artnell Co. v. Comm’r, 400 F.2d 981 (7th Cir. 1968).
Boise Cascade Corp. v. U. S., 530 F.2d 1367 (Ct. Cl.
1976).
Collegiate Cap & Gown Co. v. Comm’r, 37 T.C.M. 960
(1978) (CCH).
Of these judicial exceptions,
only one is useful for
planning purposes . . . and it
is risky.
© Steven J. Willis 2006
Automated Marketing System, Inc. v. United States,
34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist.
LEXIS 8553.
36
Schlude v. Commissioner, 372 U.S. 128 (1963)
• The case completed a trilogy of cases on the issue of
accrual accounting for income:
– Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)
– American Automobile Assn. v. United States, 367 U.S. 687 (1961)
– Schlude v. Commissioner, 372 U.S. 128 (1963)
You should cover the
judicial exceptions in
greater depth in tax
school.
Only a few cases have distinguished the
doctrine:
Artnell Co. v. Comm’r, 400 F.2d 981 (7th Cir. 1968).
Boise Cascade Corp. v. U. S., 530 F.2d 1367 (Ct. Cl.
1976).
Collegiate Cap & Gown Co. v. Comm’r, 37 T.C.M. 960
(1978) (CCH).
Of these judicial exceptions,
only one is useful for
planning purposes . . . and it
is risky.
© Steven J. Willis 2006
Automated Marketing System, Inc. v. United States,
34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist.
LEXIS 8553.
37
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
38
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
39
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
40
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
41
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
42
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
43
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which
amounts
were includible in income initially?
Each
of these arrangements
involved lessons not yet
• HOLDING:
provided.
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
44
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
Hence,
the
– Which
amounts
were includible in income
initially?
Each
of these arrangements
involved lessons not yet
• HOLDING:
provided.
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
amounts were not
earned.
45
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
46
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
47
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
Thus payment before
– Cash
earning generated
– Fair market value of the notes.
income.
– Face value of due obligations.
© Steven J. Willis 2006
48
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
49
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
Thus payment with a
cash equivalent
before earning
generated income.
50
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
Thus payment with a
cash equivalent
before earning
generated income.
For a discussion of the cash
equivalence doctrine, see Cowden v.
Comm’r, 289 F.2d 20 (5th Cir. 1961).
© Steven J. Willis 2006
51
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
This is also
a Top 100
case.
© Steven J. Willis 2006
Thus payment with a
cash equivalent
before earning
generated income.
For a discussion of the cash
equivalence doctrine, see Cowden v.
Comm’r, 289 F.2d 20 (5th Cir. 1961).
52
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
53
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
Thus items which
were due, but unpaid
and unearned
generated income.
54
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
Note the Court required inclusion of only the fair
market value of the notes, but the full face
amount of the contracts (which had no notes).
© Steven J. Willis 2006
55
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
Note the Court required inclusion of only the fair
market value of the notes, but the full face
amount of the contracts (which had no notes).
© Steven J. Willis 2006
56
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
© Steven J. Willis 2006
On remand, the Tax
Court required
inclusion of the face
amount of the
notes!!!
57
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
Schlude v. Comm’r, 22
T.C.M. 1617 (1963) (CCH)
© Steven J. Willis 2006
On remand, the Tax
Court required
inclusion of the face
amount of the
notes!!!
58
Schlude v. Commissioner, 372 U.S. 128 (1963)
• FACTS:
– Taxpayers operated a dance studio.
– They had three financial arrangements with customers:
• Cash paid in advance for lessons.
• Negotiable notes for future lessons.
• Unsecured Contractual obligations for future lessons.
• ISSUE:
– Which amounts were includible in income initially?
• HOLDING:
– Cash
– Fair market value of the notes.
– Face value of due obligations.
Schlude v. Comm’r, 22
T.C.M. 1617 (1963) (CCH)
© Steven J. Willis 2006
On remand, the Tax
Court required
inclusion of the face
amount of the
notes!!!
59
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
© Steven J. Willis 2006
60
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted
in 1958, following the Auto Club of
Automobile Club of Michigan v. Commissioner,
Michigan case.353 U.S. 180 (1957)
American
Automobile Assn. v. United States,
• It deals with pre-paid
subscriptions.
– Section 456
367 U.S. 687 (1961)
Schlude v. Commissioner, 372 U.S. 128 (1963)
• This was enacted in
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
© Steven J. Willis 2006
61
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
© Steven J. Willis 2006
62
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
© Steven J. Willis 2006
63
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
© Steven J. Willis 2006
64
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in
Hence, accrual method
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
© Steven J. Willis 2006
newspapers and
magazines may defer
inclusion of pre-payments
until they are earned.
65
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
© Steven J. Willis 2006
66
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in 1961.
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
© Steven J. Willis 2006
67
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in 1961.
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
© Steven J. Willis 2006
68
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in 1961.
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
Hence, accrual method
membership organizations may
defer inclusion of pre-payments
until they are earned.
© Steven J. Willis 2006
69
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in 1961.
• It deals with pre-paid memberships.
– Section 1272-73
• These were enacted in
• They deal with interest.
Hence, accrual method
This reversed the specific
membership organizations may
holding of the Auto Club
defer inclusion of pre-payments
of Michigan and AAA
until they are earned.
cases; although it left the
rule intact.
© Steven J. Willis 2006
70
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in 1961.
• It deals with pre-paid memberships.
– Sections 1272-73
• These were enacted in
• They deal with interest.
© Steven J. Willis 2006
71
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in 1961.
• It deals with pre-paid memberships.
– Sections 1272-73
• These were enacted in 1984.
• They deal with interest.
© Steven J. Willis 2006
72
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in 1961.
• It deals with pre-paid memberships.
– Sections 1272-73
• These were enacted in 1984.
• They deal with original issue discount interest.
© Steven J. Willis 2006
73
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in 1961.
• It deals with pre-paid memberships.
– Sections 1272-73
• These were enacted in 1984.
• They deal with original issue discount interest.
You will learn more
about OID in tax
school.
© Steven J. Willis 2006
74
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, Congress enacted several
exceptions:
– Section 455
• This was enacted in 1958, following the Auto Club of
Michigan case.
• It deals with pre-paid subscriptions.
– Section 456
• This was enacted in 1961.
• It deals with pre-paid memberships.
– Sections 1272-73
• These were enacted in 1984.
• They deal with original issue discount interest.
Although these sections superficially
deal with deferred interest, pre-paid
and deferred interest are
mathematical equivalents.
© Steven J. Willis 2006
75
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, the treasury promulgated
several exceptions:
– Rev. Proc. 71-21
– Treas. Reg. § 1.451-5
© Steven J. Willis 2006
76
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, the treasury promulgated
several exceptions:
– Rev. Proc. 71-21
– Treas. Reg. § 1.451-5
© Steven J. Willis 2006
77
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, the treasury promulgated
several exceptions:
– Rev. Proc. 71-21
– Treas. Reg. § 1.451-5
This Revenue Procedure
permits accrual method
taxpayers to defer prepayments for services if the
contract requires all services to
be performed by the end of the
following year.
© Steven J. Willis 2006
78
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, the treasury promulgated
several exceptions:
– Rev. Proc. 71-21
– Treas. Reg. § 1.451-5
© Steven J. Willis 2006
79
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, the treasury promulgated
several exceptions:
– Rev. Proc. 71-21
– Treas. Reg. § 1.451-5
This treasury regulation permits
inventory method taxpayers to defer
pre-payments for goods until the
amounts received are “substantial.”
© Steven J. Willis 2006
80
Schlude v. Commissioner, 372 U.S. 128 (1963)
• In response to the trilogy, the treasury promulgated
several exceptions:
– Rev. Proc. 71-21
– Treas. Reg. § 1.451-5
This treasury regulation permits
inventory method taxpayers to defer
pre-payments for goods until the
amounts received are “substantial.”
It also permits an acceleration of
the cost of goods sold reduction to
the year of inclusion.
© Steven J. Willis 2006
81
Schlude v. Commissioner, 372 U.S. 128 (1963)
• To summarize:
– When you hear of “Schlude,” you should think of:
• The Claim of Right Doctrine
– You should also associate the case with transactional accounting
and the notion that every year stands alone.
• Ideally, you would also associate the case with
– Burnet v. Sanford & Brooks, 282 U.S. 359 (1931)
– U.S. v. Lewis, 340 U.S. 590 (1951).
© Steven J. Willis 2006
82
Schlude v. Commissioner, 372 U.S. 128 (1963)
• To summarize:
– When you hear of “Schlude,” you should think of:
• The Claim of Right Doctrine
– You should also associate the case with transactional accounting
and the notion that every year stands alone.
• Ideally, you would also associate the case with
– Burnet v. Sanford & Brooks, 282 U.S. 359 (1931)
– U.S. v. Lewis, 340 U.S. 590 (1951).
© Steven J. Willis 2006
83
Schlude v. Commissioner, 372 U.S. 128 (1963)
• To summarize:
– When you hear of “Schlude,” you should think of:
• The Claim of Right Doctrine
The earlier of:
– You should also associate
Due the case with transactional accounting
and the notion that every year stands alone.
Paid
• Ideally, you would also associate the case with
– Burnet v. SanfordEarned
& Brooks, 282 U.S. 359 (1931)
– U.S. v. Lewis, 340 U.S. 590 (1951).
© Steven J. Willis 2006
84
Schlude v. Commissioner, 372 U.S. 128 (1963)
• To summarize:
– When you hear of “Schlude,” you should think of:
• The Claim of Right Doctrine
The earlier of:
– You should also associate
Due the case with transactional accounting
and the notion that every year stands alone.
Paid
• Ideally, you would also associate the case with
– Burnet v. SanfordEarned
& Brooks, 282 U.S. 359 (1931)
– U.S. v. Lewis, 340 U.S. 590 (1951).
© Steven J. Willis 2006
85
Schlude v. Commissioner, 372 U.S. 128 (1963)
• To summarize:
– When you hear of “Schlude,” you should think of:
• The Claim of Right Doctrine
The earlier of:
– You should also associate
Due the case with transactional accounting
and the notion that every year stands alone.
Paid
• Ideally, you would also associate the case with
– Burnet v. SanfordEarned
& Brooks, 282 U.S. 359 (1931)
– U.S. v. Lewis, 340 U.S. 590 (1951).
© Steven J. Willis 2006
86
Schlude v. Commissioner, 372 U.S. 128 (1963)
• To summarize:
– When you hear of “Schlude,” you should think of:
• The Claim of Right Doctrine
The earlier of:
– You should also associate
Due the case with transactional accounting
and the notion that every year stands alone.
Paid
• Ideally, you would also associate the case with
– Burnet v. SanfordEarned
& Brooks, 282 U.S. 359 (1931)
– U.S. v. Lewis, 340 U.S. 590 (1951).
© Steven J. Willis 2006
87
Schlude v. Commissioner, 372 U.S. 128 (1963)
•
What you need to know about Schlude:
– The earlier of rule.
• Accrual method taxpayers include income at the earliest of the time it is
due, paid, or earned.
– Exceptions to the rule.
• Cases
–
–
–
–
Artnell Co. v. Comm’r, 400 F.2d 981 (7th Cir. 1968).
Boise Cascade Corp. v. U. S., 530 F.2d 1367 (Ct. Cl. 1976).
Collegiate Cap & Gown Co. v. Comm’r, 37 T.C.M. 960 (1978) (CCH).
Automated Marketing System, Inc. v. United States, 34 AFTR 2d 74-542 (Dist. Ill.
5/13/74), 1974 U.S. Dist. LEXIS 8553.
• Sections
–
–
–
–
455
456
467
1272-73
• Administrative
– Rev. Proc. 71-21
– Treas. Reg. 1.451-5
– The cost of the rule.
• See Willis article and Raby article.
– Be aware of the argument about whether the Schlude overtax on prepayment recipients is offset by underpayments by payors.
• See Willis article and Geier article.
© Steven J. Willis 2006
88