© 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.