Tom C. Clark

“ We have concluded that for tax purposes the dues must be included as income in the calendar year of their actual receipt.
The Association is a national automobile club organized as a nonstock membership corporation with its principal office in Washington, D.C. It provides a variety of services [2] to the members of affiliated local automobile clubs and those of ten clubs which taxpayer itself directly operates as divisions, but such services are rendered solely upon a member's demand. Its income is derived primarily from dues paid one year in advance by members of the clubs. ”

“ The Congressional purpose in repealing § 452 and § 462 maintenance of the revenues-does not, however, require disapproval of sound accounting principles in cases of taxpayers who, like the petitioner, have customarily and regularly used a sound accrual accounting method in reporting advance payments. No transition is involved, and no 'double deduction' is possible. Moreover, taxpayers formerly reporting advances as income in the year of receipt can now shift to a true accrual system of reporting only with the approval of the Commissioner. ”

“ The net effect of compelling the petitioner to include all dues in gross income in the year received is to force the petitioner to utilize a hybrid accounting method-a cash basis for dues and an accrual basis for all other items. ”

“ The Code exacts its revenue from the individual member's dues which, no one disputes, constitute income. When their receipt as earned income is recognized ratably over two calendar years, without regard to correspondingly fixed individual expense or performance justification, but consistently with overall experience, their accounting doubtless presents a rather accurate image of the total financial structure, but fails to respect the criteria of annual tax accounting and may be rejected by the Commissioner. ”

“ Putting to one side the point that many of the cases relied on involved cash basis taxpayers, [18] these decisions no more pertain to deferred reporting of totally unearned receipts than do the claim of right decisions. These cases, like the claim of right cases, start from the premise that the income in question has been fully earned. [19] The underlying premise of the annual accounting requirement is that otherwise reportable income derived from a transaction cannot be excluded from gross income in order to let the taxpayer wait to see in a later year how the over-all transaction turns out. ”

“ Even then, however, if the taxpayer is forbidden to correlate earnings with related expenditures, the result will be a distortion of normal fluctuations in the taxpayer's net income. For example, in a year when there are low current expenditures because of fewer advances received in the preceding year, the result may be an inflated adjusted gross income for the current year. ”

“ In short, even if the legislative history of the repeal of § 452 and § 462 did not clearly indicate, as it does, that the repeal of those sections should have no bearing upon judicial determination of whether the deferred reporting of advances 'clearly reflects income,' the purpose of the Congress which repealed those provisions would lead to the same conclusion. ”

“ For many years, the association has employed an accrual method of accounting and the calendar year as its taxable year. It is admitted that for its purposes the method used is in accord with generally accepted commercial accounting principles The membership dues, as received, were deposited in the Association's bank accounts without restriction as to their use for any of its corporate purposes. However, for the Association's own accounting purposes, the dues were treated in its books as income received ratably [3] over the 12-month membership period. ”

“ Commissioner, 218 F.2d 697, 699, the Tenth Circuit rejected the Commissioner's reliance on the claim of right rationale and found that the deferment of advances in accord with accrual principles did 'clearly reflect * * * income' under § 41. At about the same time a Ninth Circuit decision permitted income received from the sale of goods to be offset by a deduction for the future expense of shipping the goods. ”

“ The basic concept of including advances in gross income only as they are earned is but an aspect of accrual accounting principles which have consistently received judicial approval. We have, for example, often recognized that deductions for business expenses must be reported as soon as the obligation to pay becomes 'certain.' See, e.g., United States v. ”

“ Commissioner, 1957, 353 U.S. 180, 77 S.Ct. 707, 1 L.Ed.2d 746, finding that 'the method of treatment of prepaid automobile club membership dues employed (by the Association here was,) * * * for Federal income tax purposes, 'purely artificial." 181 F.Supp. 255, 258. It accepted that case as 'a rejection by the Supreme Court of the accounting method advanced by plaintiff in the case at bar.' Ibid. The Association does not deny that its accounting system is substantially identical to that used by the petitioner in Michigan. ”

“ In computing the value of work in process, in distributing overhead to product cost, and in various other areas, the use of averages has long been accepted. See, e.g., Rookwood Pottery Co. v. Commissioner, 6 Cir., 45 F.2d 43 ”