Artnell v.
Commissioner (1988)
ARTNELL COMPANY, Petitioner, v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
No. 16586
UNITED STATES COURT OF APPEALS FOR
THE SEVENTH CIRCUIT
400 F.2d 981; 68-2 U.S. Tax Cas. (CCH)
P9593; 22 A.F.T.R.2d (P-H) 5590
September 19, 1968
JUDGES: Kiley, Swygert and Fairchild, Circuit Judges.
OPINIONBY: FAIRCHILD
OPINION: FAIRCHILD, Circuit Judge.
The tax court upheld the commissioner's determination
of deficiencies, n1 and Artnell Company, transferee taxpayer, seeks
review. The main question is whether prepayments for services (proceeds of
advance sales of tickets for baseball games and revenues for related
future services) must be treated as income when received or whether such
treatment could be deferred by the accrual basis taxpayer until the games
were played and other services rendered.
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n1 48 T.C. 411.
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Early in the 1962 baseball season, as in previous
seasons, the White Sox team was operated by Chicago White Sox, Inc. It
sold season tickets and single admissions for later games. It received
revenues for broadcasting and televising future games, and it sold season
parking books. Its taxable year would normally have run to October 31,
1962. It employed the accrual method of accounting for its own and for
income tax purposes.
Before May 31, 1962, Artnell Company had acquired all
the stock in White Sox. On that date White Sox was liquidated. Artnell
became the owner of all the assets and subject to all the liabilities. It
continued to operate the team.
As of May 31, the balance sheet of White Sox showed as
deferred unearned income that part of the amount received for season
tickets, advance single admissions, radio, television, and season parking
books, allocable to games to be played after May 31. As the games were
played Artnell took into income the amounts of deferred unearned income
allocated to each.
The White Sox income tax return for the taxable year
ending May 31, 1962 (because of the liquidation) was filed by Artnell as
transferee. The return did not include the deferred unearned income as
gross income. The commissioner decided it must be included and determined
deficiencies accordingly.
When a business receives money in exchange for its
obligation to render service or deliver goods and the costs of performance
are incurred in a later accounting period, treatment of the receipt as
income tends to reflect an illusory or partially illusory gain for the
period of receipt. Accountancy has techniques (e. g. deferral of income,
reserves for expenses) for achieving a more realistic reflection. The
degree to which such techniques are available under income tax statutes is
a vexing question. n2
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n2 See Aland, Prepaid Income and Estimated Future
Expenses, Jan. 1968 ABA Journal 84; Annotation: Income Taxes -- Prepayment
-- When Income, 9 L. Ed. 2d 1191.
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The commissioner urges the simple answer "that
deferral of income is a matter for Congress to permit and, until Congress
acts, deferral must be disallowed." He stands on "the
established rule that an accrual basis taxpayer must include in gross
income in the year of receipt prepaid items for which services will be
performed in a later year. The rule implements the annual accounting
principle which is at the heart of the federal taxing statute and which
forbids transactional accounting for income tax purposes, however sound
such methods might be for financial and other purposes under commercial
accounting practice." n3
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n3 The quotations are from the commissioner's brief.
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Artnell relies upon statutory language which requires
computation of taxable income under the accrual method of accounting
regularly used by the taxpayer unless such method "does not clearly
reflect income." n4 This language could call for a factual
determination in the individual case whether an accrual system which
employs the deferral of income technique clearly reflects income. Artnell
contends that the White Sox system does so.
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n4 26 U.S.C. sec. 446.
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The commissioner's principal contention, which was
sustained by the tax court, is that there is a rule of law which rejects
deferral of income. Presumably he believes that any system in which
prepaid income is deferred "does not clearly reflect income" and
would consider the present statutory provisions for deferral in the case
of prepaid subscription income n5 and prepaid dues of certain membership
organizations n6 extensions of legislative grace.
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n6 26 U.S.C. sec. 456.
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One could reason from the statutory language that any
deferral of prepaid income which fulfills standards of sound accounting
practice could be employed by an accrual basis taxpayer, and the
commissioner would not have power to reject it. Three Supreme Court
decisions, Automobile Club of Michigan, n7 American Automobile
Association, n8 and Schlude n9 have made it clear that this is not the
law.
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n7 Automobile Club of Michigan v. Commissioner of
Internal Revenue (1957), 353 U.S. 180, 77 S. Ct. 707, 1 L. Ed. 2d 746.
n8 American Auto. Ass'n v. United States (1961), 367
U.S. 687, 367 U.S. 687, 81 S. Ct. 1727, 6 L. Ed. 2d 1109.
n9 Schlude v. Commissioner of Internal Revenue (1963),
372 U.S. 128, 83 S. Ct. 601, 9 L. Ed. 2d 633.
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There are two other lines of reasoning reflected in
the three decisions cited. All three held, upon consideration of the
particular facts, that the commissioner did not abuse his discretion in
rejecting a deferral of income where the time and extent of performance of
future services were uncertain. Thus in Automobile Club of Michigan:
"The pro rata allocation of the membership dues in monthly amounts is
purely artificial and bears no relation to the services which petitioner
may in fact be called upon to render for the member." In American
Automobile Association: "That 'irregularity,' however, is highly
relevant to the clarity of an accounting system which defers receipt, as
earned income, of dues to a taxable period in which no, some or all the
services paid for by those dues may or may not be rendered." In
Schlude: "The American Automobile Association Case rested upon an
additional ground which is also controlling here. Relying upon Automobile
Club of Michigan * * *, the Court rejected the taxpayer's system as
artificial since the advance payments related to services which were to be
performed only upon customers' demands without relation to fixed dates in
the future. The system employed here suffers from that very same vice * *
*." In Schlude the Court also found that certain expenses were
deducted in the year the payments were received even though related income
had been deferred to later periods.
The uncertainty stressed in those decisions is not
present here. The deferred income was allocable to games which were to be
played on a fixed schedule. Except for rain dates, there was certainty. We
would have no difficulty distinguishing the instant case in this respect.
A second consideration is reflected in American
Automobile Association and Schlude. It is that Congress is aware of the
problem and that it is the policy of the Supreme Court to defer, where
possible, to congressional procedures in the tax field. Thus in American
Automobile Association: "At the very least, this background indicates
congressional recognition of the complications inherent in the problem and
its seriousness to the general revenues. We must leave to the Congress the
fashioning of a rule which, in any event, must have wide ramifications. *
* * Finding only that, in light of existing provisions not specifically
authorizing it, the exercise of the Commissioner's discretion in rejecting
the Association's accounting system was not unsound, we need not
anticipate what will be the product of further 'study of this entire
problem.'" In Schlude: "Plainly, the considerations expressed in
American Automobile Association are apposite here. We need only add here
that since the American Automobile Association decision, a specific
provision extending the deferral practice to certain membership
corporations was enacted * * * continuing, at least so far, the
congressional policy of treating this problem by precise provisions of
narrow applicability. Consequently, as in the American Automobile
Association Case, we invoke the 'long-established policy of the Court in
deferring, where possible, to congressional procedures in the tax field,'
and, as in that case, we cannot say that the Commissioner's rejection of
the studio's deferral system was unsound."
Has the Supreme Court left an opening for a decision
that under the facts of a particular case, the extent and time of future
performance are so certain, and related items properly accounted for with
such clarity, that a system of accounting involving deferral of prepaid
income is found clearly to reflect income, and the commissioner's
rejection deemed an abuse of discretion? Or has it decided that the
commissioner has complete and unreviewable discretion to reject deferral
of prepaid income where Congress has made no provision? The tax court
apparently adopted the latter view, for it concluded "that the
Supreme Court would reach the same decision regardless of the method used
by the taxpayer for deferring prepaid income."
It is our best judgment that, although the policy of
deferring, where possible, to congressional procedures in the tax field
will cause the Supreme Court to accord the widest possible latitude to the
commissioner's discretion, there must be situations where the deferral
technique will so clearly reflect income that the Court will find an abuse
of discretion if the commissioner rejects it.
Prior to 1955 the commissioner permitted accrual basis
publishers to defer unearned income from magazine subscriptions if they
had consistently done so in the past. He refused to allow others to adopt
the method. n10 In 1955 his refusal was held, by the tenth circuit, in
Beacon, n11 to be an abuse of discretion. In Automobile Club of Michigan,
the Supreme Court distinguished Beacon, on its facts, because
"performance of the subscription, in most instances, was, in part,
necessarily deferred until the publication dates after the tax year."
The Court, however, expressed no opinion upon the correctness of Beacon.
In 1958, Congress dealt specifically with the Beacon problem. n12 It is at
least arguable that the deferral as income of prepaid admissions to events
which will take place on a fixed schedule in a different taxable year is
so similar to deferral of prepaid subscriptions that it would be an abuse
of discretion to reject similar accounting treatment.
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modified,Rev. Rul. 57-87, 1957-1 Cum. Bull. 507. See also Anno., 9 L. Ed.
2d 1191, at 1201-03.
n11 Beacon Publishing Company v. Commissioner of
Internal Revenue (10th Cir., 1955), 218 F.2d 697.
n12 26 U.S.C. sec. 455.
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In any event the prepaid admission situation
approaches much closer to certainty than the situations considered in
Automobile Club of Michigan, American Automobile Association, or Schlude.
The instant case was presented to the tax court on a
stipulation of facts. The parties agreed as to the amounts of prepaid
revenue allocated to the games played after May 31. The stipulation does
not set forth other facts from which it could be determined that all other
relevant items were so treated in the White Sox method of accounting that
the income attributable to the first seven months of its normal fiscal and
taxable year was clearly reflected.
The commissioner now points out that Artnell failed to
produce this evidence and argues here that we must affirm on that ground
even if we disagree with the commissioner's primary contention.
We think, however, that the commissioner shares
responsibility for the failure of proof, for he seems to have let the tax
court judge believe that this was not an issue. The judge wrote:
"Since the respondent does not contend that the petitioner's method
for deferring the advance receipts fails to match properly income and
related expenses, we must therefore decide whether prepaid income is
taxable in the year received, regardless of the merits of the proposed
method for deferring it."
We choose, however, not to base our decision on an
inferred waiver of this issue by the commissioner. It is specially
important in this area to have the facts carefully developed.
We conclude that the tax court erred in deciding that
these revenues were income when received regardless of the merits of the
method employed. There must be further hearing in the tax court to
determine whether the White Sox method of accounting did clearly reflect
its income in its final, seven month, taxable year.
Artnell raised another question, which we decide even
though the answer will have practical importance only if the ultimate
decision on deferral of income goes against Artnell.
Artnell contended that three portions of the proceeds
of advance tickets sales were not income in any event. They are:
(1) Federal admissions tax formerly imposed by 26
U.S.C. sec. 4231. The tax court noted that White Sox was required by law
to collect the tax from the purchaser and 26 U.S.C. sec. 7501 made the
money so collected a special fund in trust for the United States, and
decided in favor of Artnell. The point is not contested in this court.
(2) Municipal amusement tax. The city of Chicago
imposed a license tax upon amusements. An amount equal to 3 percent of the
gross receipts from admissions to games played in one month was to be paid
by the tenth of the following month. There was no provision which would
make White Sox the agent or trustee of a portion of the receipts for this
purpose. The tax court concluded that White Sox became liable for the
amount of the tax as the games were played and that no portion of the
advance receipts should be excluded from gross income on this account. n13
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n13 See footnote 14, infra.
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(3) Visiting team compensation. The constitution of
the American League provided that the visiting club shall receive a
specified amount each on all paid admissions. The home club must make this
payment within one day after the last game of each series. The tax court
concluded that these amounts were not held as an agent or trustee for the
visiting teams and were not to be excluded from gross income on that
account. n14
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n14 The tax court also held that all the events which
would determine liability for the municipal tax and the compensation to
the visiting team had not occurred before May 31, 1962, and that therefore
no deduction was allowable on an accrual basis. Artnell relies in this
court solely on the proposition that these amounts were not income.
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When White Sox sold a ticket to a future game, the
probability arose, subject to possible refund and similar contingencies,
that when the game was played this sale would be reflected in White Sox'
liability to the city and the visiting club. Although the amount of the
liability which would arise was dependent on the sale, we think the tax
court correctly decided that such liability was, for this purpose, similar
in character to the other liabilities which would be incurred in
fulfilling the obligation to the purchaser of the ticket. There was
nothing which created any fiduciary duty with respect to the funds
received. There was not even the creation of a liability simultaneously
with the sale. In the event that the question of exclusion from income of
the municipal amusement tax and visiting team compensation becomes
material we agree with the tax court that these items are not to be
excluded.
The decision of the tax court is reversed and the
cause remanded for further hearing consistent with this opinion.
Artnell Company, Petitioner v. Commissioner of
Internal
Revenue, Respondent
Docket No. 2780-64
UNITED STATES TAX COURT
48 T.C. 411
June 23, 1967, Filed
DISPOSITION: Decision will be entered under Rule 50.
SYLLABUS: Petitioner's transferor, a professional
baseball corporation, excluded from gross income all advance receipts from
tickets, radio and television, and parking fees, which related to games to
be played in the following taxable year. The transferor corporation was
then liquidated before such games were played. Held, such advance receipts
are taxable when received, regardless of the liquidation; except that the
amounts collected as Federal admissions tax are a trust fund and not part
of the collector's gross income.
COUNSEL: William A. Cromartie, for the petitioner.
William J. Gerard, for the respondent.
JUDGES: Simpson, Judge.
OPINIONBY: SIMPSON
OPINION: The respondent has asserted that the
petitioner is liable for $ 563,170.12 as transferee of the assets of
Chicago White Sox, Inc. Such liability arises from a determination of
deficiency in the transferor's income tax of $ 303,109.07 for its taxable
year November 1, 1961, to May 31, 1962. The respondent also disallowed a
net operating loss carryback from such taxable year to the transferor's
taxable year January 1, 1959, to October 31, 1959, and, as a result,
determined a deficiency of $ 260,061.05 for that taxable year.
The first issue is whether advance receipts from
ticket sales, radio and television revenues, and parking fees were
includable in gross income of Chicago White Sox, Inc., for the year of
receipt. If so, there remains the question of whether that corporation
could deduct or exclude from gross income that part of such receipts which
represents Federal admissions tax, City of Chicago amusement tax, and the
visiting baseball teams' shares of the receipts.
FINDINGS OF FACT
All of the facts in this case were fully stipulated at
the time of trial, and those facts are so found.
The petitioner, Artnell Co. (Artnell), is a Delaware
corporation which had its principal place of business in Chicago, Ill., on
the date when the petition in this proceeding was filed. On March 26,
1964, the respondent mailed two notices of transferee liability to the
petitioner. One notice was predicated upon the transferor's taxable year
January 1, 1959, to October 31, 1959, and
asserted a liability of $ 260,061.05; the other notice
was based upon the transferor's taxable year November 1, 1961, to May 31,
1962, and asserted a liability of $ 303,109.07. The respective periods are
hereafter referred to as the taxable years 1959 and 1962.
The petitioner's transferor was Chicago White Sox,
Inc. (White Sox), formerly the American League Baseball Club of Chicago,
an Illinois corporation. White Sox filed corporate income tax returns for
the pertinent periods with the district director of internal revenue at
Chicago, Ill.
In May of 1962, the petitioner acquired all of the
shares of White Sox from its then shareholders and liquidated White Sox on
May 31, 1962. The liquidation of White Sox transferred all of its assets
to the petitioner and made the petitioner its transferee. The transferor's
final income tax return was for the taxable year 1962.
White Sox used an accrual method of accounting for
determining income for both book and income tax purposes. Its taxable year
was the calendar year until December 31, 1958, when, with the approval of
the respondent, it changed to a taxable year ending on October 31. The
taxable year 1959 was the first taxable year ending on such date.
White Sox, for many years prior to May 31, 1962,
operated the Chicago White Sox, a baseball team in the American League,
playing its home games at Comiskey Park, Chicago. Following the
liquidation of White Sox, the petitioner conducted the operations formerly
carried on by White Sox.
In determining a deficiency in White Sox's income tax,
the adjustments made by the respondent included the addition of $ 954,024
to its gross income for taxable year 1962. This sum represented gross
receipts from advance ticket sales, advance radio and television revenues,
and sales of season parking passes. The petitioner has challenged this
adjustment in several respects; and in addition, it seeks other
adjustments which would result in an increased net operating loss for the
taxable year 1962. The increased loss, if allowable, would produce an
increased carryback to the taxable year 1959 and result in a refund. White
Sox paid $ 238,599.28 in income tax for the taxable year 1959 and nothing
for the taxable year 1962.
During the taxable year 1962, White Sox received the
gross amount of $ 1,192,180.80 representing advance ticket sales. Of this
sum, $ 762,777 represented gross receipts from 275,514 tickets for
baseball games to be played at Comiskey Park during the 1962 baseball
season, but after the close of the taxable year 1962. These proceeds were
deposited by White Sox in a regular account with a Chicago bank.
During the taxable year 1962, the City of Chicago
imposed an amusement tax of 3 percent of gross receipts from admission
fees to athletic contests. Of the gross amount of $ 762,777 received in
the advance sale of tickets for baseball games to be played after May 31,
1962, $ 21,568 represented the 3-percent amusement tax on the admission
fees for such games. White Sox paid the Chicago amusement tax monthly,
each payment covering admission fees for games played in the preceding
month.
During the taxable year 1962, a Federal admissions tax
of 1 cent for each 10 cents or major fraction thereof was imposed on
admission charges in excess of
$ 1. Of the gross amount of $ 762,777 received in the
advance sale of tickets for baseball games to be played after May 31,
1962, $ 43,854 represented the Federal admissions tax on the admission
charges for such games. White Sox paid the Federal admissions tax as the
games to which the admission charges related were played.
During the taxable year 1962, the constitution of the
American League of Professional Baseball Clubs provided in article XIV,
section 9, as follows:
The visiting Club shall receive twenty cents (20
cents) each on all bleacher or special children admissions and thirty
cents (30 cents) each on all other paid admissions. A tabulated statement
of the visiting Club's share of receipts from all paid admissions at each
championship game shall be transmitted to the Treasurer of the League and
to the visiting Club by the member of the League at whose park such game
has been played, together with the remittance to the League of the
League's share of such receipts and remittance to the visiting Club of its
share of such receipts, within one business day after the end of the last
game of each series of games played during the Championship season.
Of the gross amount of $ 762,777 received in the
advance sale of tickets for games to be played after May 31, 1962, $
82,654 represented the visiting clubs' shares of the admission charges for
such games. In accordance with the league constitution, White Sox paid the
visiting club's share of such admission charges after playing the last
game of each series of games to which the charges related.
No part of the gross amount of $ 762,777 received in
the advance sale of tickets for baseball games to be played after May 31,
1962, was taken into income by White Sox for the taxable year 1962. It was
carried on the balance sheet of White Sox as of May 31, 1962, as deferred,
unearned income. After May 31, 1962, petitioner included such amount in
its gross income as it played the games to which the advance ticket sales
related.
Each ticket sold by White Sox admitted the holder
thereof to a particular game (two games in the case of so-called double
headers) to be played on a particular date. In the event of a postponement
of that game, the ticket would admit the holder to the postponed game on
the date set for its play. In no case was a ticket for a particular game
accepted as admission to some other game. However, White Sox consistently
followed the practice of granting to the holder of a ticket to any game,
whether purchased for an individual game or on a season basis, a refund of
the full ticket price upon surrender of the ticket prior to the play of
the game.
During the taxable year 1962, White Sox received $
400,000 of radio and television revenue, of which $ 176,467 was allocable
to games to be played after May 31, 1962. No part of such $ 176,467 was
taken into income by White Sox for the taxable year 1962. It was carried
on the balance sheet of White Sox as of May 31, 1962, as deferred,
unearned income. After May 31, 1962, petitioner took such amount into its
gross income as it played the games to which the amount related.
White Sox sold 389 season parking books for the 1962
baseball season for an aggregate amount of $ 21,395. Of this amount, $
14,780 is allocable to home playing dates after May 31, 1962. No part of
this $ 14,780 was taken into income by White Sox for the taxable year
1962. It was carried on the balance
sheet of White Sox as of May 31, 1962, as deferred,
unearned income. After May 31, 1962, petitioner took such amount into its
gross income as the home playing dates to which it related occurred.
OPINION
This case presents us with another of the many
controversies concerning the proper tax accounting for prepaid income.
Three times in recent years the issue has been considered by the Supreme
Court (Schlude v. Commissioner, 372 U.S. 128 (1963); American Automobile
Assn. v. United States, 367 U.S. 687 (1961); Automobile Club v.
Commissioner, 353 U.S. 180 (1957)); and on several recent occasions, it
has been passed on by this Court (Hagen Advertising Displays, Inc., 47 T.C.
139 (1966); Decision, Inc., 47 T.C. 58 (1966); Chester Farrara, 44 T.C.
189 (1965)). In all these cases, it has been held that the respondent
could apply section 446(b) of the Internal Revenue Code of 1954 n1 and
require prepaid income to be taxed when received. Nevertheless, this
petitioner argues vigorously that those decisions do not govern this case
and that in this case the taxation of the income should be deferred until
it is earned.
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n1 All statutory references are to the Internal
Revenue Code of 1954.
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Before we reach that substantive issue, however, the
petitioner confronts us with a procedural problem. He argues that since
the respondent's deficiency notice purported to find the advance receipts
taxable under section 61, the respondent may not argue the applicability
of section 446(b), as he now proposes to do in his brief. The petitioner
believes that our opinion in Burrell Groves, Inc., 16 T.C. 1163 (1951),
supports his position.
We are not convinced by the petitioner's argument. The
question is was the petitioner given adequate notice of the respondent's
contention that the prepaid income was taxable upon receipt. In Hagen
Advertising Displays, Inc., supra, the notice of deficiency also referred
merely to section 61, but this Court considered that the question of the
applicability of section 446(b) was properly raised. Taking into
consideration all the circumstances of this case, we think that the
petitioner had adequate notice of the issue of when the advance receipts
should be reported for purposes of tax accounting. Cf. Nat Harrison
Associates, Inc., 42 T.C. 601, 617 (1964); Hilbert L. Bair, 16 T.C. 90
(1951), affd. 199 F. 2d 589 (C.A. 2, 1952). Furthermore, Burrell Groves,
Inc., involved the predecessor of section 482 and a deficiency notice
which neither referred to that section, nor made the allocations permitted
by such section. This case involves section 446(b) and a deficiency notice
which computes taxable income in a manner permitted by that section. This
case is, therefore, distinguishable from Burrell Groves, Inc., but not
from Hagen Advertising Displays, Inc., and we must consider the
applicability of section 446(b).
In connection with the principal substantive issue of
the case, the petitioner presents the question as one of to whom income is
taxable and argues that it must be taxed to the person who earns it. He
also argues that this case is distinguishable from the prepaid income
decisions by the Supreme Court because in all of them the Court found that
the method of accounting used by the taxpayer did not accurately reflect
income. He says that the courts have
never required prepaid income to be taxed upon receipt
when the taxpayer was using an accurate method for deferring the income.
Finally, the petitioner argues that if we should decide the principal
issue against his position, some of the advance receipts were not received
under a claim of right and are not, therefore, includable in income upon
receipt.
The respondent's position is simply that all advance
income is reportable and taxable at the time of receipt, without
diminution for what he regards as the estimated expenses of earning such
income.
Since the respondent does not contend that the
petitioner's method for deferring the advance receipts fails to match
properly income and related expenses, we must therefore decide whether
prepaid income is taxable in the year received, regardless of the merits
of the proposed method for deferring it. We must also decide whether the
tax treatment of prepaid income is different when the person who receives
it is not the person who performs the services which earn the income.
We hold that the respondent acted properly under
section 446(b) when he required the White Sox to include the advance
receipts in gross income for the year in which they were received.
In the Supreme Court decisions, the Court set forth
alternative bases for its decisions. In each case it found that the method
of accounting used by the taxpayer was deficient, but in the later cases
it also held that in view of the legislative history concerning tax
accounting for prepaid income, such income is taxable upon receipt except
when Congress expressly provides for its deferment. Notwithstanding the
Court's criticism of the methods of accounting used by the taxpayers in
those cases, we believe that the Court would reach the same result without
regard to the method used by the taxpayer for deferring prepaid income. In
American Automobile Assn. v. United States, supra, the Supreme Court
upheld the respondent's exercise of discretion under section 446(b),
despite expert testimony tending to show that the taxpayer's deferral of
income comported with sound accounting principles. In Automobile Club v.
Commissioner, supra, the Supreme Court upheld the respondent's
determination that a deferral of income actually received did not clearly
reflect income, despite the fact that the taxpayer had used such a system
of accounting for several years. It is clear to us that the use of the
same accounting method for many years, or the fact that such a method is
otherwise sound accounting, is not a reason to hold that the respondent
abused his discretion in finding that such a method did not clearly
reflect income for tax purposes.
Although the petitioner discusses at some length the
legislative history of the treatment of prepaid income, we think that the
Supreme Court in the American Automobile Assn. decision disposed of his
contentions. After reviewing the legislative history, the Court said:
It appears that in this action Congress first
overruled the long administrative practice of the Commissioner and holding
of the courts in disallowing such deferral of income for tax purposes and
then within a year reversed its own action. This repeal, we believe,
confirms our view that the method used by the Association could be
rejected by the Commissioner. While the claim is made that Congress did
not "intend to disturb prior law as it affected permissible accrual
accounting provisions for tax purposes," H.R. Rep. No. 293 84th
Cong., 1st Sess. 4-5, the cold fact is that it repealed the only law
incontestably permitting
the practice upon which the Association depends. To
say that, as to taxpayers using such systems, Congress was merely
declaring existing law when it adopted @ 452 in 1954, and that it was
merely restoring unaffected the same prior law when it repealed the new
section in 1955 for good reason, is a contradiction in itself,
"varnishing nonsense with the charm of sound." Instead of
constituting a merely duplicative creation, the fact is that @ 452 for the
first time specifically declared petitioner's system of accounting to be
acceptable for income tax purposes, and overruled the long-standing
position of the
Commissioner and courts to the contrary. And the
repeal of the section the following year, upon insistence by the Treasury
that the proposed endorsement of such tax accounting would have a
disastrous impact on the Government's revenue, was just as clearly a
mandate from the Congress that petitioner's system was not acceptable for
tax purposes. * * * [367 U.S. at 695.]
In its conclusion, the Court also said: "We must
leave to the Congress the fashioning of a rule which, in any event, must
have wide ramifications. * * * [367 U.S. at 697.]"
This is strong language, and we think that it
indicates that the Supreme Court would reach the same decision regardless
of the method used by the taxpayer for deferring prepaid income.
In the Hagen Advertising case, recently decided by
this Court, the taxpayer was using a method which accurately matched
prepaid income with the cost of goods sold. Nonetheless, this Court held
that the prepaid income was reportable when received. We think that this
decision clearly establishes the position of this Court and rejects the
position urged by the petitioner.
Moreover, we are not persuaded by the petitioner's
argument that to tax the prepaid income on receipt taxes it to the wrong
person. In all the prepaid income cases, the services which earned the
income were to be performed in the future; yet that fact did not justify
postponing the taxation of the income. If White Sox had continued to
operate the baseball team but had ended its taxable year on May 31, 1962,
the advance receipts would have been reportable in such taxable year. We
cannot see how the liquidation alters that result. The income is still
taxable when received. The line of cases cited by the petitioner involved
an essentially different problem. Williamson v. United States, 292 F. 2d
524 (Ct. Cl. 1961); J. Ungar, Inc., 26 T.C. 331 (1956), affd. 244 F. 2d 90
(C.A. 2, 1957); Susan J. Carter, 9 T.C. 364 (1947), affd. 170 F. 2d 911
(C.A. 2, 1948); Jud Plumbing & Heating, Inc., 5 T.C. 127 (1945), affd.
153 F. 2d 681 (C.A. 5, 1946). In them the services were performed in
advance of the receipt of the income, and in them the Court found that the
parties were attempting to shift the tax burden to a person who had not
earned the income. The Court struck down the attempted shifting of the tax
burden. The prepaid income cases present an entirely different problem --
that is, should receipts be taxed when they are in hand, or should their
taxation be deferred until they are earned; and we see no sufficient
reason for departing from the general rule that such income is taxable
when received.
The petitioner's alternative argument is that those
portions of advance receipts which represent Federal admissions tax, City
of Chicago amusement tax, and the visiting clubs' shares of ticket sales
were not income or were deductible expenses during the taxable year 1962.
Not all receipts of money or property are a part of
the taxpayer's gross income and subject to the rule of the prepaid income
cases. Hagen Advertising Displays, Inc., supra at 12. The receipt of a
bona fide loan and the collection of funds as an agent or trustee of
another are examples of receipts which are not taxable to the person who
merely receives the funds. Willard S. Heminway, 44 T.C. 96 (1965); James
M. Hutchinson, et al., 11 B.T.A. 789 (1928).
The collection of Federal admissions tax is a
collection of funds on behalf of the U.S. Government, and such funds are
not a part of the collector's gross income. This tax was imposed on the
amount paid for admission to the games, and section 4231 required the
person paying for such admission to also pay the tax. Section 4291
required White Sox to collect the tax, and section 7501(a) provides as
follows:
SEC. 7501. LIABILITY FOR TAXES WITHHELD OR COLLECTED.
(a) General Rule. -- Whenever any person is required
to collect or withhold any internal revenue tax from any other person and
to pay over such tax to the United States, the amount of tax so collected
or withheld shall be held to be a special fund in trust for the United
States. * * *
The language making such collections a special fund
was enacted as part of the Revenue Act of 1934, and the legislative
history of that act discloses a clear intent to make the collector of the
admissions tax a trustee, rather than a mere debtor. n2 Accordingly, no
part of the $ 43,854 collected as Federal admissions tax is includable in
White Sox's gross income for the taxable year 1962.
- - - - - - - - - - - - - - - - - -Footnotes- - - - -
- - - - - - - - - - - - -
n2 "Existing law provides with respect to a
number of taxes that the amount of the tax shall be collected or withheld
from the person primarily liable by another person, who is required to
return and pay to the Government the amount of the taxes so collected or
withheld by him. This is true, for example, in the case of the taxes on
admissions, checks, and telephone and telegraph services. Under existing
law the liability of the person collecting and withholding the taxes to
pay over the amount is merely a debt, and he cannot be treated as a
trustee or proceeded against by distraint. Section 606 of the bill as
reported impresses the amount of taxes withheld or collected with a trust
and makes applicable for the enforcement of the Government's claim the
administrative provisions for assessment and collection of taxes." S.
Rept. No. 558, 73d Cong., 2d Sess., p. 53 (1934).
- - - - - - - - - - - - - - - - -End Footnotes- - - -
- - - - - - - - - - - - -
On the other hand, no part of the $ 21,568
representing a license tax imposed by the City of Chicago is excludable or
deductible from White Sox's gross income for the taxable year 1962. The
applicable city ordinances provide that the tax is a license tax upon
amusements within the city and is to be paid by the 10th day of the
calendar month for all gross receipts during the preceding calendar month.
An examination of sections 104-1 through 104-3 of the Municipal Code of
the City of Chicago leads us to the conclusion that White Sox was liable
for the tax; and no provision which would make White Sox the agent or
trustee of the city has been brought to our attention. Accordingly, there
is no reason to exclude such receipts from gross income. In addition, the
$ 21,568 in question represented the tax on admissions which had not yet
occurred, and the proceeds
of which might be refunded. At the close of the
taxable year 1962, there was no way to ascertain the paid attendance for
the succeeding months or the amount of the liability to the City of
Chicago for those months. All of the events which determined liability for
the tax had not occurred by the end of White Sox's taxable year 1962, and,
therefore, no accrual of a deduction was allowable. United States v.
Anderson, 269 U.S. 422 (1926); sec. 1.461-1(a) (2), Income Tax Regs.
We also find that no part of the $ 82,654 representing
the visiting teams' shares of advance ticket sales is deductible or
excludable from White Sox's gross income for the taxable year 1962. The
amounts received for the tickets were paid to the White Sox for playing
the games. Those amounts were income of the White Sox; and they were not
held as an agent or trustee for the visiting teams. The liability to the
visiting teams does not alter White Sox's claim to the income. Compton
Bennett, 23 T.C. 1073 (1955). Thus, there is no reason to exclude the
visiting teams' shares from the income of the White Sox for the taxable
year 1962. The provision of the constitution of the American League of
Professional Baseball Clubs, providing for payment to the visiting team,
expressly states that payment is to be made after the games are played.
The sum in question here relates to games which had not been played in the
taxable year 1962, and there was no certainty that each game on the
schedule would be played, nor was the amount that would be due to the
visiting club known or ascertainable in May of 1962. Therefore, no
deduction was properly accruable. United States v. Anderson, supra; sec.
1.461-1(a) (2), Income Tax Regs.
All remaining issues have been abandoned by the
petitioner or conceded by the respondent.
In order to reflect our resolution of the issues and
the concessions of the parties,
Decision will be entered under Rule 50.
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