Auto. Club of New York, Inc. v. Comm'r of Internal Revenue

• Decision Date: 20 July 1959
• Docket Number: Docket No. 61999.
• Citation: 32 T.C. 906
• Parties: AUTOMOBILE CLUB OF NEW YORK, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

32 T.C. 906

AUTOMOBILE CLUB OF NEW YORK, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 61999.

Tax Court of the United States.

Filed July 20, 1959.

Michael Kaminsky, Esq., for the petitioner.

Norman L. Rapkin, Esq., for the respondent.

1. Petitioner's members paid their annual membership fees in advance. In reporting such fees petitioner, on an accrual basis, included in income only one-twelfth of each fee for each month of the year, thus leaving unreported for any given taxable year the portion of the fee allocable to the period of membership in the following taxable year, which, however, was reported in the following taxable year. Held, the Commissioner properly required petitioner to report as income all the fees received during the taxable year.

2. Held, the Commissioner correctly required petitioner to report as income the annual excess of proceeds from the sale of savings plan coupons over redemptions thereof.

Respondent determined deficiencies in petitioner's income and excess profits taxes for the calendar years, and in the amounts, indicated below.

+----------------------------------+
                ¦Year¦Excess profits¦Income tax    ¦
                +----+--------------+--------------¦
                ¦    ¦tax           ¦              ¦
                +----+--------------+--------------¦
                ¦1944¦              ¦$488.74       ¦
                +----+--------------+--------------¦
                ¦1945¦$13,174.40    ¦1   (1,731.16)¦
                +----+--------------+--------------¦
                ¦1946¦              ¦117,325.04    ¦
                +----+--------------+--------------¦
                ¦1947¦              ¦83,984.22     ¦
                +----+--------------+--------------¦
                ¦1948¦              ¦114,435.77    ¦
                +----+--------------+--------------¦
                ¦1949¦              ¦240,893.85    ¦
                +----+--------------+--------------¦
                ¦1950¦              ¦225,991.83    ¦
                +----------------------------------+
                

In an amendment to his answer respondent alleges that certain additions to income, upon which the above deficiencies are in part based, should be increased by the amounts shown in the following schedule, thereby producing an increase in the deficiencies previously determined:¹

Petitioner earnestly urges upon us a highly elaborate analysis of the Supreme Court's opinion in the Automobile Club case in support of its position. But that opinion affirmed the decision of the Court of Appeals which in turn approved our decision in that case, and, notwithstanding certain language relied upon by petitioner, we cannot say that there was an intention on the part of the Supreme Court to disapprove the theory on which this long line of cases has been bottomed. To the contrary, we find monitory language about the Beacon and Schuessler cases where the decisions of this Court were reversed.

Whether the Commissioner's action herein be regarded merely as correcting certain items within petitioner's system of accounting or whether it be treated as requiring a different system of accounting is not a matter of crucial significance. If the former, he was plainly justified in so doing because the income in question must be taxed no later than when received under either cash or accrual systems of accounting. And if the latter, he is on even stronger ground. For, the latitude allowable to the Commissioner is very broad, and it is not the function of the courts to exercise the discretion which under the statute is committed to him. As the Supreme Court said in Brown v. Helvering, 291 U.S. 193, in sustaining the Commissioner in disallowing both the accrual of reserves for future cancellations of insurance policies and the deferral of gross overriding commissions received on such policies (pp.203-204):

Moreover, the method employed by the taxpayer is never conclusive. If in the opinion of the Commissioner it does not clearly reflect the income, ‘the computation shall be made upon such basis and in such manner’ as will, in his opinion, do so. United States v. Anderson, 269 U.S. 422, 439 * * * ; Lucas v. American Code Co., 280 U.S. 445, 449 * * *

It is not the province of the court to weigh and determine the relative merits of systems of accounting. * * *

See also Security Flour Mills v. Commissioner, 321 U.S. 218, 286.

The contention that the tax is ‘in violation of the Sixteenth Amendment’ is without substance. Petitioner completely misconceives the purpose and effect of the amendment. See Penn Mutual Indemnity Co., 32 T.C. 653. Moreover, the amounts received do not cease to be ‘income’ under the statute merely because all the expenses allocable to the earning of such income have not yet been incurred. Wholly apart from the question whether pertinent expenses generally affect the quality of receipts as income, the point here is that net income under the statute is computed on an annual basis, and, as pointed out above, there is no necessary correlation in any given year between receipts and expenses. Expenses with respect to income not yet earned are deductible when paid or accrued; and conversely, income is reportable when received or accrued, notwithstanding that some, or even all, expenses allocable thereto have not yet been incurred. Plainly, nothing in the Constitution prohibits any such result.

Subsequent to the preparation of this opinion, the Court of Appeals for the Second Circuit, on May 28, 1959, reversed our decision in Bressner Radio, Inc., 28 T.C. 378. However, the Court of Appeals itself undertook to distinguish Automobile Club of Michigan v. Commissioner, 353 U.S. 180, affirming 230 F.2d 585 (C.A. 6), which, in turn, affirmed our decision, 20 T.C. 1033. Without pausing to comment upon the distinctions, we think that the present case more closely resembles the Automobile Club of Michigan case, and we therefore find no reason to reach a different result here.

2. Proceeds from the sale of savings plan coupons.— Petitioner advances three arguments to support its contention that the excess of annual proceeds from the sale of coupons over annual redemptions does not represent taxable income: (a) That it did not intend to make a profit on the transaction since it was obligated to pay out to members the same amount which it received in the form of sales proceeds; (b) that it did not ‘own’ the proceeds but held them as trustee for its members; and (c) that the Commissioner's determination is arbitrary in that, if the Commissioner wishes to avert petitioner's realization of a windfall from the failure of petitioner's members to redeem their coupons, his determination must be limited to such windfall.

We have had a number of occasions in the past to consider similar contentions, in analogous situations, and have repeatedly held that unrestricted income, subject only to a contingent liability to refund in future years, must be reported in the year of receipt, with the consequence that deductions for refunds may be taken in the year in which such refunds are in fact made. See, e.g., Beadleston & Woerz, Inc., 5 B.T.A. 165; Plymouth Brewing & Malting Co., 16 B.T.A. 123; Okonite Co., 4 T.C. 618, affirmed on other issues 155 F.2d 248 (C.A. 3), certiorari denied 329 U.S. 764; Fort Pitt Brewing Co., 20 T.C. 1, affirmed 210 F.23 6 (C.A. 3). The result is required by the system of reporting income on the basis of annual accounting periods.

The fact that petitioner did not intend ultimately to profit from the coupon transactions is not controlling. As was stated by the Court of Appeals in Fort Pitt Brewing Co., supra at 8, ‘even though no trust is created, such a procedure of deposits and repayments is not designed for gain; yet at times it may yield income. These characteristics are properly reflected in accounting and recognized in taxation.’ Similarly, in Plymouth Brewing & Malting Co., supra at 128, it was stated:

Usually at the end of any year, containers are outstanding in the hands of the customers and income for the year includes charges for the outstanding containers; in the end, the charges will be nullified by credits for such of the containers as are returned. Although there is intended ultimately no gain in the transaction, the tide of ‘income’ ebbs and flows over the dividing line between the statutory taxable years. We have decided that a reserve is unallowable by way of excluding from income the charge for containers expected to be returned. Beadleston & Woerz, Inc., 5 B.T.A. 165.

Our opinion in the Fort Pitt case held that the Commissioner did not act arbitrarily in refusing to accept a method of accounting whereby taxpayer credited all deposits, and debited all refunds, to a reserve account for the containers in which it sold its products; we recognized that under the taxpayer's method the Commissioner might be compelled to wait an unreasonable time, perhaps indefinitely, for the collection of tax on amounts which in fact would never be refunded. The facts in the case at bar suggest a similar conclusion, witness the increase in the credit balance of the reserve account from $57,854.04 in 1944 to $968,812.66 in 1950, an increase of nearly 17 times during 1 6-year period, while membership increased only about 10 times during the same period. Unless petitioner is able to account for coupon transactions an a manner likely to avert the obvious windfall inherent in its present method, it fails to carry the burden of proving the Commissioner's determination to be arbitrary.

Finally, petitioner's argument that it did not ‘own’ the proceeds but held them subject to a ‘trust’ for its members has no support in the record, particularly in view of petitioner's stipulation that the funds might be used for general corporate purposes. Clay Sewer Pipe Ass'n v. Commissioner, 139 F.2d 130 (C.A. 3), affirming 1 T.C. 529; Krim-Ko Corporation, 16 T.C. 31. Seven-Up Co., 14 T.C. 965, upon which petitioner relies, was distinguished in Krim-Ko Corporation, supra at 40, as involving ‘a mere conduit in passing funds.’ Cf Broadcast Measurement Bureau, Inc., 16 T.C. 988.

Reviewed by the Court.

Decision will be entered under Rule 50.

OPPER, J., concurring:...