Schuessler v. Commissioner
230 F.2d 722 (5th Cir. 1956)
Schuessler was a company that
sold furnaces. As part of each sale, they guaranteed to go out to the
purchaser's site and turn the furnace on and off each season for five
Schuessler set aside some
money from each sale (about $13k total) to represent their estimated cost
of sending workers to turn the furnaces on and off.
Schuessler's furnaces cost
about $20 more than their competitors who didn't make such a guarantee.
The $13k Schuessler
budgeted for future expenses is known as a reserve.
Schuessler used accrual
method of accounting, which says that
the taxpayer only counts income when all of the events that entitle the
taxpayer to receive the income have occurred.
When Schuessler filed their
taxes, they did not include the $13k in their gross income. The IRS disagreed and assessed a deficiency.
Schuessler argued that they
hadn't earned the $13k until the furnaces got turned on and off,
therefore they didn't need to include it in their current year's gross
income when they collected the money
because they used the accrual method.
It should only be included
five years from now when the guarantee expired.
The IRS argued that
Schuessler sold furnaces, and they earned the money as soon as the sale
was completed. Therefore the $13k needed to be included in their current
year's gross income.
The Tax Court found for the
IRS. Schuessler appealed.
The Appellate Court reversed.
The Appellate Court found
that the costs of servicing the furnaces had been factored into the cost
of each sale.
The Court found that
Schuessler's method of accounting came much closer to giving the correct
picture of their income that would a system in which they sold equipment
in one year and received an inflated price because they obligated
themselves to refund part of it in services later but was required to
report the total receipts as income on the high level of the sales years
and take deductions on the low level of the service years.
The Court found that
Schuessler's actions were in accordance with the statutory requirements
of the Tax Code.