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
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
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