Artnell Co. v. Commissioner
400 F.2d 981 (7th Cir. 1968)

  • The White Sox (a professional baseball team) was owned by a holding company called Chicago White Sox Inc. (CWS Inc.). CWS Inc. used the accrual method of accounting.
    • CWS Inc. sold tickets for games to be played next season, and did not count the income until the game was actually played.
      • Under the accrual method of accounting, the taxpayer only counts income when all of the events that entitle the taxpayer to receive the income have occurred.
  • In 1962, Artnell bought the team, which dissolved CHS Inc. At the time, CWS Inc. had sold tickets for games to be played in the future. As the games were played, Artnell counted the amount of deferred unearned income allocated to each game as actual income.
  • When he filed his taxes, Artnell included the income from the games already played, but did not include the deferred unearned income (from games not played yet) in his gross income. The IRS disagreed and assessed a deficiency.
    • Artnell argued that under the accrual method he didn't earn the income until 1963, so he shouldn't have to pay taxes until then.
    • The IRS argued that even when a taxpayer uses the accrual method, they still have to report income in the year in which it was received.
      • The IRS pointed at Schlude v. Commissioner (372 U.S. 128 (1963)), which held that even under the accrual method, taxpayers must include as income in a particular year advance payments by way of cash, negotiable notes, and contract installments falling due but remaining unpaid during that year.
  • The Tax Court found for the IRS. Artnell appealed.
  • The Appellate Court reversed and found for Artnell.
    • The Appellate Court found that in general, taxpayers that use the accrual method of accounting only count income when earned, as opposed to when it was received.
    • However, the Court found that there is a general rule based on 26 U.S.C. 446(b) that requires accrual method taxpayers to include advance payments in the year of receipt.
    • However, the Court found that there should be an exception to the general rule for taxpayers (such as Artnell), who are able to prove that services will be performed on specific fixed dates in a subsequent tax year.
  • Basically, 446(b) says regardless of which accounting method a taxpayer uses income received for goods and services needs to be counted when it is collected and not when it is earned because most of the time it is completely unclear when exactly that income would be earned. However, if the taxpayer can show (as in this case), that it is very clear exactly when that income would be earned, then they are allowed to defer it until that time.