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© Steven J. Willis 2006 1
INTRODUCTION TO TAX SCHOOL
Top 100 Cases
Schlude v. Commissioner, 372 U.S. 128 (1963)
INTRODUCTION TO TAX SCHOOL
Top 100 Cases
Schlude v. Commissioner, 372 U.S. 128 (1963)
© Steven J. Willis 2006 2
Schlude v. Commissioner, 372 U.S. 128 (1963)
• Schlude is famous for one important proposition:
© 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.
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 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.
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.
Note this applies to accrual taxpayers . . . not to those using other methods of accounting, such as the cash method.
© 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.
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).
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.
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).
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 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.
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!
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.
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!
While income is subject to an “earlier of” test . . . deductions are subject to a “later of” 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.
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 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.
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.
This means the amounts are due, but not yet paid or earned.
© 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.
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 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.
•The date the income is earned under the traditional “all events” test.
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.
This means the amounts are paid, 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.
•The date the income is earned under the traditional “all events” test.
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.
This means the amounts are paid, but not yet earned.
Be careful on the meaning of paid. It can include actual receipt or receipt
of a cash equivalent.
Be careful on the meaning of paid. It can include actual receipt or receipt
of a cash equivalent.
© 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.
•The date the income is earned under the traditional “all events” test.
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.
This means the amounts are paid, but not yet earned.
Be careful on the meaning of paid. It can include actual receipt or receipt
of a cash equivalent.
Be careful on the meaning of paid. It can include actual receipt or receipt
of a cash equivalent.
© 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.
•The date the income is earned under the traditional “all events” test.
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.
This means the amounts are paid, but not yet earned.
Be careful on the meaning of paid. It can include actual receipt or receipt
of a cash equivalent.
Be careful on the meaning of paid. It can include actual receipt or receipt
of a cash equivalent.
© 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.
•The date the income is earned under the traditional “all events” test.
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.
This means the amounts are paid, but not yet earned.
Be careful on the meaning of paid. It can include actual receipt or receipt
of a cash equivalent.
Be careful on the meaning of paid. It can include actual receipt or receipt
of a cash equivalent.
But, it does not include receipt of a mere deposit. See, Comm’r v. Indianapolis Power & Light Co., 493 U.S. 203 (1990).
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.
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.
This means the amounts are paid, but not yet earned.
Be careful on the meaning of paid. It can include actual receipt or receipt
of a cash equivalent.
Be careful on the meaning of paid. It can include actual receipt or receipt
of a cash equivalent.
But, it does not include receipt of a mere deposit. See, Comm’r v. Indianapolis Power & Light Co., 493 U.S. 203 (1990).
But, it does not include receipt of a mere deposit. See, Comm’r v. Indianapolis Power & Light Co., 493 U.S. 203 (1990).
This is also a Top 100
case.
This is also a Top 100
case.
© 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.
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 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.
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.
This means the amounts are earned, but not yet due or paid.
© 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.
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.
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.
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.
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.
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.
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 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.
•The date the income is earned under the traditional “all events” test.
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.
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.
This is also the test under generally
accepted accounting principles [GAAP].
This is also the test under generally
accepted accounting principles [GAAP].
© Steven J. Willis 2006 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.
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.
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.
This is also the test under generally
accepted accounting principles [GAAP].
This is also the test under generally
accepted accounting principles [GAAP].
This term is on the Top 100 terms list.
This term is on the Top 100 terms list.
© Steven J. Willis 2006 25
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.
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.
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.
This is also the test under generally
accepted accounting principles [GAAP].
This is also the test under generally
accepted accounting principles [GAAP].
This term is on the Top 100 terms list.
This term is on the Top 100 terms list.
© 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)
© 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)
Each supports the earlier of test for
accrual of income.
Each supports the earlier of test for
accrual of income.
© 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)
Each supports the earlier of test for
accrual of income.
Each supports the earlier of test for
accrual of income.
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).
Automated Marketing System, Inc. v. United States, 34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist. LEXIS 8553.
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).
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)
Each supports the earlier of test for
accrual of income.
Each supports the earlier of test for
accrual of income.
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).
Automated Marketing System, Inc. v. United States, 34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist. LEXIS 8553.
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).
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)
Each supports the earlier of test for
accrual of income.
Each supports the earlier of test for
accrual of income.
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).
Automated Marketing System, Inc. v. United States, 34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist. LEXIS 8553.
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).
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)
Each supports the earlier of test for
accrual of income.
Each supports the earlier of test for
accrual of income.
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).
Automated Marketing System, Inc. v. United States, 34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist. LEXIS 8553.
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).
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)
Each supports the earlier of test for
accrual of income.
Each supports the earlier of test for
accrual of income.
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).
Automated Marketing System, Inc. v. United States, 34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist. LEXIS 8553.
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).
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 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)
Each supports the earlier of test for
accrual of income.
Each supports the earlier of test for
accrual of income.
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).
Automated Marketing System, Inc. v. United States, 34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist. LEXIS 8553.
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).
Automated Marketing System, Inc. v. United States, 34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist. LEXIS 8553.
Of these judicial exceptions, only one is useful for planning
purposes . . . and it is risky.
© Steven J. Willis 2006 37
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:
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.
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).
Automated Marketing System, Inc. v. United States, 34 AFTR 2d 74-542 (Dist. Ill. 5/13/74), 1974 U.S. Dist. LEXIS 8553.
Of these judicial exceptions, only one is useful for planning
purposes . . . and it is risky.
You should cover the judicial exceptions in greater depth in tax
school.
You should cover the judicial exceptions in greater depth in tax
school.
© 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.
• 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.
• 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.
• 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.
• 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.
• 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?
• HOLDING:– Cash
– Fair market value of the notes.
– Face value of due obligations.
• 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 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:– Which amounts were includible in income initially?
• HOLDING:– Cash
– Fair market value of the notes.
– Face value of due obligations.
• 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.
Each of these arrangements involved lessons not yet
provided.
Each of these arrangements involved lessons not yet
provided.
© Steven J. Willis 2006 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 initially?
• HOLDING:– Cash
– Fair market value of the notes.
– Face value of due obligations.
• 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.
Each of these arrangements involved lessons not yet
provided.
Each of these arrangements involved lessons not yet
provided.
Hence, the amounts were not
earned.
Hence, the amounts were not
earned.
© 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?
• HOLDING:– Cash
– Fair market value of the notes.
– Face value of due obligations.
• 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 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:– Cash
– Fair market value of the notes.
– Face value of due obligations.
• 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 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.
• 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 before earning generated
income.
Thus payment before earning generated
income.
© 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.
• 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 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.
• 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.
Thus payment with a cash equivalent before earning
generated income.
© 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.
• 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.
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).
For a discussion of the cash equivalence doctrine, see Cowden v. Comm’r, 289 F.2d 20 (5th Cir. 1961).
© Steven J. Willis 2006 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.
• 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.
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).
For a discussion of the cash equivalence doctrine, see Cowden v. Comm’r, 289 F.2d 20 (5th Cir. 1961).
This is also a Top 100
case.
This is also a Top 100
case.
© 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.
• 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 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.
• 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 items which were due, but unpaid
and unearned generated income.
Thus items which were due, but unpaid
and unearned generated income.
© 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.
• 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).
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.
• 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).
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 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.
• 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.
On remand, the Tax Court required inclusion of the face
amount of the notes!!!
On remand, the Tax Court required inclusion of the face
amount of the notes!!!
© Steven J. Willis 2006 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.
• 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.
On remand, the Tax Court required inclusion of the face
amount of the notes!!!
On remand, the Tax Court required inclusion of the face
amount of the notes!!!Schlude v. Comm’r, 22
T.C.M. 1617 (1963) (CCH)Schlude v. Comm’r, 22
T.C.M. 1617 (1963) (CCH)
© Steven J. Willis 2006 59
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.
• 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.
On remand, the Tax Court required inclusion of the face
amount of the notes!!!
On remand, the Tax Court required inclusion of the face
amount of the notes!!!Schlude v. Comm’r, 22
T.C.M. 1617 (1963) (CCH)Schlude v. Comm’r, 22
T.C.M. 1617 (1963) (CCH)
© 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 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 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.
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)
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 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
• It deals with pre-paid memberships.
– Section 1272-73• These were enacted in
• They deal with interest.
© Steven J. Willis 2006 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.
Hence, accrual method newspapers and
magazines may defer inclusion of pre-payments
until they are earned.
Hence, accrual method newspapers and
magazines may defer inclusion of pre-payments
until they are earned.
© 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
• 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.
© 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 membership organizations may defer inclusion of pre-payments
until they are earned.
Hence, accrual method membership organizations may defer inclusion of pre-payments
until they are earned.
© 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.
– 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.
Hence, accrual method membership organizations may defer inclusion of pre-payments
until they are earned.
This reversed the specific holding of the Auto Club
of Michigan and AAA cases; although it left the
rule intact.
This reversed the specific holding of the Auto Club
of Michigan and AAA cases; although it left the
rule intact.
© 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
• 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 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.
© 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.
You will learn more about OID in tax
school.
You will learn more about OID in tax
school.
© Steven J. Willis 2006 75
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.
Although these sections superficially deal with deferred interest, pre-paid
and deferred interest are mathematical equivalents.
© 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
© 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
This Revenue Procedure permits accrual method taxpayers to defer pre-
payments for services if the contract requires all services to be performed by the end of the
following year.
This Revenue Procedure permits accrual method taxpayers to defer pre-
payments for services if the contract requires all services to be performed by the end of the
following year.
© 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
© 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.”
This treasury regulation permits inventory method taxpayers to defer
pre-payments for goods until the amounts received are “substantial.”
© Steven J. Willis 2006 81
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.”
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.
It also permits an acceleration of the cost of goods sold reduction to
the year of inclusion.
© 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
– 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 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
– 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).
The earlier of:
Due
Paid
Earned
The earlier of:
Due
Paid
Earned
© 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
– 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).
The earlier of:
Due
Paid
Earned
The earlier of:
Due
Paid
Earned
© 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
– 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).
The earlier of:
Due
Paid
Earned
The earlier of:
Due
Paid
Earned
© Steven J. Willis 2006 87
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).
The earlier of:
Due
Paid
Earned
The earlier of:
Due
Paid
Earned
© Steven J. Willis 2006 88
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 pre-payment recipients is offset by underpayments by payors.
• See Willis article and Geier article.
• 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 pre-payment recipients is offset by underpayments by payors.
• See Willis article and Geier article.
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