Bressner Radio, Inc. v. Comm'r of Internal Revenue, Docket No. 56457.

• Decision Date: 16 May 1957
• Docket Number: Docket No. 56457.
• Citation: 28 T.C. 378
• Parties: BRESSNER RADIO, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

28 T.C. 378

BRESSNER RADIO, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 56457.

Tax Court of the United States.

Filed May 16, 1957.

Sidney Gelfand, C.P.A., for the petitioner.

Victor H. Frank, Jr., Esq., and Joseph F. Rogers, Esq., for the respondent.

1. Petitioner was in the business of selling television sets. In connection with this business it entered into a substantial number of contracts with its customers in which it agreed to service the sets for a period of 12 months. It kept its books on an accrual basis. Petitioner received without restriction the full contract price during the taxable year the contracts were entered into, but sought to report such receipts partly in the taxable year and partly in the succeeding year on a monthly pro rata basis by reason of its agreement to render service for a period of 12 months. Held, the entire amounts received in each year should be 12 months. Held, the entire amounts received in each year should be reported as income in the year of receipt. Automobile Club of Michigan v. Commissioner, 353 U.S. 180.

2. As an alternative, petitioner contends that if it be required to report the receipts as held above, then it is entitled to accrue and deduct the estimated costs that might be incurred to earn such receipts. Held, since such estimated costs were neither paid nor incurred during the taxable year in which the deduction therefor is claimed, no such deduction is allowable under section 23(a)(1)(A), I.R.C. 1939. Brown v. Helvering, 291 U.S. 193.

3. During May 1951, petitioner ceased to service television sets and agreed with another corporation that the latter would take over the unexpired portion of petitioner's service contracts and render all the service called for in such contracts in consideration of $195,895.60. Petitioner accrued this amount on its books as a liability as of May 31, 1951. Held, petitioner is entitled, under section 23(a)(1)(A), supra, to deduct such amount from its income for the taxable year ended May 31, 1951. Brown v. Helvering, supra.

ARUNDELL, Judge:

This proceeding was brought to test the correctness of respondent's determination of deficiencies in income tax for the fiscal years ended May 31, 1948, 1949, and 1950, in the amounts of $23,986.82, $43,196.24, and $9,866.83, respectively.

Petitioner alleges that respondent erred in including in taxable income amounts received during the taxable year in connection with television service contracts for which service was to be rendered over a period of time subsequent to the taxable year. In the alternative, petitioner alleges that respondent erred in not permitting it to accrue estimated expenses for performing services in subsequent years. A net loss carryback from petitioner's fiscal year ended May 31, 1951, is also in dispute.

FINDINGS OF FACT.

Petitioner was incorporated in 1930 under the laws of the State of New York. Its principal place of business is in Brooklyn, New York.

Petitioner kept its books on an accrual basis of accounting and filed its Federal corporation income tax returns for each of the fiscal years ended May 31, 1948 through 1951, with the then collector of internal revenue for the first district of New York.

During the years in question, petitioner sold a substantial number of television sets. In connection with these sales it also entered into a substantial number of contracts called ‘Service Contract for Television Receiver.’ Among other things these service contracts provided:

BRESSNER RADIO, INC., agrees to service the television receiver designated above, at the purchaser's address shown below, and to furnish to the purchaser all labor, replacement of parts and tubes * * * necessary to provide proper operation and functioning of the said television receiver at the point of original installation, for a period of (12 months) from the date of this contract * * * The service company shall not be obligated to service the television equipment or to furnish re replace the parts occasioned by other than normal usage * * *

Beginning with the year ended May 31, 1950, petitioner also entered into renewal service contracts containing substantially the same provisions as immediately set forth above.

The average price received by petitioner for each service contract was between $80 and $100, depending upon the set to be serviced. Payments under the contracts were to be made by purchasers in installments. The contracts were in turn sold by petitioner to a bank for cash.

In the fiscal year ended May 31, 1947, petitioner deferred from income television service receipts of $24,203.96 on its books and Federal income tax return. The $24,203.96 thus deferred was reported as income in the taxable year ended May 31, 1948. The respondent, upon audit of petitioner's tax returns for the year ended May 31, 1947, reduced the amount of deferred income representing television service receipts from $24,203.96 to $18,967.75.

During the fiscal years ended May 31, 1948 through 1951, the number of television and air-conditioning¹ service contracts entered into by petitioner, the total contract price thereof, the amounts deferred by petitioner, and the amounts petitioner now contends should have been deferred, are as follows:

+----+
                ¦¦¦¦¦¦
                +----+
                

                         Number       Contract    Amount     Present
                Fiscal year ended May 31 of contracts price       deferred   contention
                1948                     1,248        $107,071.00 $52,478.69 $41,281.66
                1949                     3,452        281,956.34  158,627.84 128,466.35
                1950                     6,274        526,136.19  227,582.79 229,046.78
                1951                     6,070        489,091.98  2
                

The total number of months for which petitioner would be obligated to render service was 12 times the number of contracts entered into. These obligations fell in the year in which the contract was entered into and in the following year as follows:

+----+
                ¦¦¦¦¦¦
                +----+
                

                                              Months falling in
                                         Number    Number of
                Fiscal year ended May 31 of        months of
                                         contracts obligation Current Following
                                                              year    year
                1947                     352       4,224      890     3,334
                1948                     1,248     14,976     6,585   8,391
                1949                     3,452     41,424     16,560  24,864
                1950                     6,274     75,288     32,598  42,690
                1951                     6,070     72,840     40,585  32,255
                

The capital stock of petitioner was owned 50 per cent by Joseph Bressner and 50 per cent by Harry A. Creppa. Bressner was president and Creppa was vice president of petitioner during the years under consideration. Bressner's duties consisted of general supervision and practically running the service and sales departments. Bressner devoted about one-half of his time and Creppa about one-fourth of his time to the service department.

Petitioner's cost of installing a television set was approximately $19, which consisted of about $10 for labor, $7 for antenna, and about $2 for clerical overhead.

Television sets sold in the years ended May 31, 1948 through 1950, had many defects which necessitated service calls. It was necessary to make many service calls to adjust television sets when new television stations began telecasting. The average number of service calls per set over a year's time was between 8 and 12.

On or about May 18, 1951, Bressner caused a corporation to be organized under the name of Serv-All Corporation, hereinafter referred to as Serv-All. This corporation was organized to service the television sets sold by petitioner and other dealers and to do a general service business. On or about May 20, 1951, petitioner and Serv-All agreed that the latter would take over the unexpired portion of petitioner's service contracts and render all the service called for in such contracts in consideration of $195,895.60, which amount petitioner, as of May 31, 1951, accrued on its books as a liability in favor of Serv-All. Petitioner paid the amount in full during the following fiscal year. Petitioner did not report the $195,895.60 as income in its fiscal year ended May 31, 1951, but neither did it claim any deduction for the liability of the same amount, which liability it incurred in the fiscal year ended May 31, 1951. The stockholders of Serv-All consisted of Bressner's wife, Nettie; Creppa's wife, Julia; Louis Nipomnick; and a Dr. Lober who was a relative of the Bressners. Petitioner ceased servicing television sets after Serv-All was organized. The $195,895.60 was treated as additional income by respondent in the fiscal year ended May 31, 1951, since that would have been the amount petitioner would have deferred if Serv-All had not been organized. Serv-All was a separate and distinct legal entity.

During the taxable years in question, the moneys received from the service contracts were not placed in a separate bank account. There were no restrictions placed upon these moneys; they could be used for any expense or purpose that petitioner desired.

At the time petitioner filed its income tax returns for the years 1948, 1949, and 1950, petitioner did not establish reserves for expenses in the subsequent years for servicing contracts executed in 1948, 1949, and 1950.

For the taxable year ended May 31, 1948, the estimated cost of servicing the 8,391 contract-months falling in the following year was $82,315.71, or at the rate of $9.81 per contract-month.

For the taxable year ended May 31, 1949, the estimated cost of servicing the 24,864 contract-months falling in the following year was $280,465.92, or at the rate of $11.28 per contract-month.

For the taxable...