Beacon Publishing Company, a Kansas Corporation v. Commissioner of Internal Revenue
218 F.2d 697
10th Cir.
1955
Check Treatment

*1 COMPANY, PUBLISHING BEACON Petitioner, corporation, Kansas INTERNAL OF

COMMISSIONER Respondent. REVENUE,

No. 4920. Appeals, Court Circuit. Tenth

Jan. *2 dispute.

The material facts are not taxpayer kept The and filed its its books income tax returns on the published daily newspaper in Wich- ita, present Kansas. The stockholders acquired under the their stock in 1928 agreement terms of limited an taxpayer’s payable bills and accounts $100,000, unless consented to writ- ing by the seller. Prior maintained on its books an account en- “Country titled Circulation” in which country agents’ credits were carried for receipts prepaid subscriptions. and No separate kept prepaid account was for subscriptions. prepaid subscription The income included in this account was not liability and was considered treated as a for in which it was as income Beginning received. campaign payer carried on an intensive subscriptions prepaid for the secure working obtaining purpose of additional violating $100,000 capital without agreement. prepaid limitation debt thirty days subscriptions were from years. money five received was not segregated working used as and was capital. employed ac- In prepare

counting a statement firm to Without account. its books from Colo, Denver, Kobey, (of Ko- Nathan firm this of the consent Denver, McCarthy), bey, Mitchell & adjusting entries number amade Colo., petitioner. was one of which the close Washington, Wiprud, W. D. C. Grant by an ac- $95,686.92 credit to defer Holland, Atty. Gen., (H. Brian Asst. Subscriptions”. “Prepaid entitled count Jackson, Slack, Davis Ellis N. Lee A. 1944, the in- years For the Morton, Jr., Sp. Atty. Assts. to the W. subscrip- prepaid from the received Gen., brief), with him on the were account as a credited was tions liability, respondent. thereof defer- amount attempt No subscription income. red BRATTON, MURRAH, and Before ac- costs to this allocate made to was Judges. PICKETT, Circuit obtaining the cost to show or count Judge. PICKETT, subscriptions. It is conceded prepaid Circuit single by question presented as to restriction petition of the tax to review decision they fact, were obtained pre- use. whether sums received for their court is They were newspaper paid should have treated in the income received included been belonging The Commissioner dis- received, to it. for the and included unexpired subscrip- the deferment spread over the allowed thereof income for periods. full amount tion quite there- clear that under the accrual in which it was increasing liability method of the accrual for that it is receipt redetermination, of income and the Tax Court not its actual On H. Liebes determines when it taxable. *3 sustained the action Commissioner. Cir., & Co. 90 F.2d v. 9 21 T.C. 610. Thus, case, 932. if the large subscrip- In had sold a of 41 of the 1939 number Under Section 41, year, Code, paper tions for ternal 26 U.S.C.A. to its the taxable Revenue § made in the of a must which were to be net income taxpay upon subsequent year, computed the basis of taxable amount the the accounting period in accord would accrue and the er’s annual be taxable when reg accounting important the of An ance with ularly employed sold. system keeping of the feature of the books accrual is that reported If this method does income shall at such the a time clearly computa income, will, possible, reflect the that it by so far as the be offset earning expenditures it, tion shall be made Commissioner the incident to expenditures in accordance such method rather than ing related with as to earn- clearly reflect the income. Section 42 other income. Commissioner v. Se- gross curity provides Mills, Cir., 10 the amount all Flour 165, 281, 596, included for the affirmed 321 income shall be taxable 64 S.Ct. 725; Castings was received 88 L.Ed. unless Aluminum Co. accounting permitted Routzahn, 92, 11, “under methods of v. 282 U.S. 51 S.Ct. 234; 41, such amounts are 75 L.Ed. Niles Bement Section Pond Co. States, 357, properly accounted for to be a v. United 281 U.S. 50 S.Ct. 901; period.” purpose 251, 74 L.Ed. different obvious Lucas v. Ox Fibre provisions Co., 115, is 273, to obtain from Brush 281 U.S. these 50 S.Ct. reflecting the a return its true 74 L.Ed. American National Com- pany States, 99, income and to treat income received and v. United 274 U.S. 47 consistently. 520, deductible disbursements S.Ct. 71 L.Ed. United States Mitchell, Anderson, 9, 422, 131, United v. States 271 U.S. v. 269 U.S. 46 S.Ct. 12, 418, 46 L.Ed. S.Ct. 799. 70 L.Ed. 347. sustaining In the Generally, methods two the applied what has become the Tax Court are income determine used to right” the doctrine. known as “claim receipts and cash the says in his brief The Commissioner here We are methods. disbursements legal theory is under “the the doctrine accrual method. concerned lying Tax decision.” This Court’s taxpayer keeps his books and Where a income, theory, applied to taxable is basis, in an accrual returns

files his funds receives that when accounted is during year under a claim taxable earned or becomes is the amount right possession and has the irrespective that he fixed, of when with no right funds restriction ultimately “It is received. is disposition, it is income even receipt to their though not the actual and to receive subsequently found claim when income determines of income invalid, re gross income included must be repay purposes. quired funds. North Ameri When the income Burnet, v. 286 U.S. and ab Oil becomes fixed can Consolidated to receive 613, 417, duty L.Ed. solute, of one on the accrual S.Ct. Lewis, report 340 U.S. 71 S.Ct. it arises.” United v. States basis 560; Healy Harmon, Cir., v. Commis L.Ed. sioner, 73 S.Ct. See also Clark Woodward Security Co., 179 F.2d 176. L.Ed. Construction subject Co., supra.1 taxpayer, of these ceived Flour Mills each which are tax, question presented to income cases was whether must be returned in ownership receipt ownership or claim of owned claimed regardless taxpayer, them to be of the method the funds was sufficient for receiving adopted, person which has been taxed as income to the actually them, or when to when the funds are earned. was no issue as application In Such rule limits the for taxation. were returnable right” cases, accrual method to that class of cases so-called “claim of money accounting system where has was of been earned and the fixed, to it importance. has been the re If funds are *4 ceipt delayed right subsequent is to ceived, doctrine a under claim of the period. application The they the doctrine are returnable in the in regardless would most cases result in a distor of the method of tion of an accrual employed by true income. the instance, For a construction contractor case, might paid is In the instant be in advance for the con dispute ownership building no as to the struction of a quire which would re belong they Admittedly, following to the complete, funds. the to dis restriction as to with no with all of the costs of construction in question is, during position. following year. when shall curred the A court, might they as it year’s taxed? The tax rancher sell his next calf cases, crop, lan took the literal or has in other guage lamb and receive opinions advance, from context of the it with the entire cost of foregoing applied production it following cases and to be incurred the though year. prepaid might paid income here even A to the manufacturer ownership dispute as to the in advance for there is articles to be made and gave subsequent delivered in no consideration a of the funds.2 It each cases, appli these if the tax accounts court’s fact that logical cation of the rule is carried to its accrual method for its income conclusion, prepaid receipts, necessary expenses incur the because and will not following received them under a until tax claim earn the income to right, during words, would years. be taxable In other the tax able payments even holds that advance court Healy Commissioner, supra In North American Oil Consolidated v. [345 1. In v. Burnet, supra referring 674], [286 U.S. 52 S.Ct. 73 S.Ct. to 615], succinctly right” principle the rule was stated as fol- “claim of the Su- lows: preme said: Court earnings right’ “If phrase a receives a term ‘claim “The right lawyers. typical a claim of and without restriction as of old to Its known disposition, property to its has he received income in real law in deal- has been use required return, by possession, which he is ing to even with title adverse though may it still be claimed that he is has rule been that title can where the money, to retain entitled and even only by possession acquired adverse though may adjudged he still be liable right occupant he has a claims that equivalent.” its restore possession owner. The to be of income taxation the field of the term Motor Tacoma Co. v. Commission South analogous. Club, There is a claim er, 411; Your T.C. Health Inc. by Commissioner, and treated a are received funds El 82; when taxpayer v. T.C. E. B. belonging Commissioner, The fact him. liott Co. v. 45 B.T.A. subsequently Airlines, Inc., Commissioner, is found to be the claim National v. that Michigan a does not Automobile court 9 T.C. Club invalid A mis- did exist. the claim v. 20 T.C. and see fact claim, a Unit- Dade Farms v. nonetheless also South claim is taken 818; Capital Lewis, Warehouse ed States Commissioner, Cir., Co. 95 L.Ed. 560.” 71 S.Ct. Newspapers, Inc., Commissioner, omitted.) (Footnotes Booth 294, affirmed, Cir., T.C. F.2d 55. improperly applied on in which he has taxpayer kept his hooks one legal principle. a return an accrual completed basis contract on a Congress cognizance of the has taken produce destroyed. would This would be existing prepaid income situation as to permit incongruous would result. sought remedy and has statute. during periods not of taxes the collection contemplated Code, The 1954 Internal Revenue method the accrual limitations, permits certain accrual basis taxpayer into accounting, and force the taxpayers reporting of ad- to defer the receipts all cash basis vanced year, as income until reasoning or not the Such was items. years, which, under the upon. relied purpose of cases regular payer’s requires application of rule Such an income is earned and to assure prepaid income report its items income and will be deductions deduc its and to accrue cash basis properly taken into account.3 bookkeeping hybrid creates tions. system urges return results in tax *5 clearly Com reflect income. years prior does not had since Co., Lumber Texas South missioner v. accounts to 1943 and 1944 carried these 695, 496, 501, L.Ed. 92 68 items, S.Ct. 333 U.S. cannot its as cash it on books destroys large extent, accounting a change 831. To system of without its method principle in inherent of the Commissioner. Treas the consent ury Plainly, accounting. 42 con Regulations of templates Section 111, 29.41-2. Sec. be sums can re Commissioner vested with wide dis change in a other than when determining turned cretion in whether a says shall be in accounting that income ceived. taxpayer’s in a method of year received, “un the taxable Helvering, cluded shall be allowed. Brown v. accounting less, per of under 193, methods 356, 291 54 U.S. S.Ct. 78 L.Ed. 41, any such under section Castings mitted 725; Aluminum Rout Co. v. properly be accounted amounts are to zahn, supra; Anderson, United States v. period.” a different This not supra; as of United States v. American Can 412, Co., 177, Commissioner has exer case where the 50 L.Ed. 280 U.S. S.Ct. 74 require Niles Bement Pond United cised his broad discretion to Co. v. however, adopt accounting States, supra. taxpayer, method to accounting clearly change income, will reflect but is its did not seek to 3. ly ing regularly employed by poses of difference between the come, cepted flecting accordance come of a nue Code of revenue mittee proved reads: “Present result of court decisions and such purposes ordinarily report questions have upon standard methods of method computed law developed many divergencies of expenses and income computation are regulations the Senate Finance income. of when provides clearly confined almost section, regarded principles. See. shall method of account- should be taken 452, for business certain Nevertheless, reflects Internal state as generally 26 computed income the net The areas clearly accounting taxpayer, U.S.C.A., types rulings, entire- Reve- Com- pur- ap- ac- re- in- in- in- port Code bill and tions are permit sure that accepted accounting principles, 4694. signed to able income. “Tlie House and “The account the law into United States reporting only until Congressional to accrual-basis changes once in the bring ail items of income and taxpayer’s your [*] the income is Committee of advance arriving year, the income-tax taken into harmony embodied in committee’s bill Senate, your [*] computation taxpayers Service, regular at net income. years, committee’s bill p. with earned.” account [*] Finance method and to as- pp. provisions 1954 generally are de- which, deduc- House defer [*] once, Re- in- apply Helvering, the Brown system. than did more Dade clear- S.Ct. South adopted in use to L.Ed. Cir., Commissioner, ly tax- Farms v. 138 F.2d This reflect its income. 818; Clay Pipe Association v. payer Com- Sewer do and the had the Commissioner, require Cir., it. 139 F.2d had missioner Co., Capital Can Warehouse Co. v. American States v. Cir., And supra. 171 F.2d 395. therefore Commissioner A discretion of the empower I would Tax affirm the decision of the him to add does not given year, gross Court. for a belongs rightfully in an- an item which Frame, other Cir., Commissioner v. Estate, Mnookin’s We have no doubt that keeping change method of

could not its Com- of the the consent books without items, missioner, if the even as to MURDOCKACCEPTANCE CORPORA- resulted in an avoidance TION, Appellant, due, doubt nor have do we taxes may, but that America, UNITED STATES of apply consent of the Appellee. accounting which he has method adopted, No. 15158. applied theretofore *6 particular item, when that Appeals, Court of clearly reflect errors and correct Fifth Circuit. change in We his income. think Feb. category. falls within the latter this case is re- Tax Court decision versed. Judge (dissent-

BRATTON, Circuit

ing). rep- the funds

resenting prepaid restrictions

claim of respect The funds were to their use. placed capital structure of the pro- no limitations or

scriptions upon application, enjoy- their

ment, disposition. was required make refunds in of can- case prepaid subscriptions,

cellations contingent. obligation de- was entirely upon pended whether cancella- subscription

tions made. Unless

should cancelled no refund would be

made. seems me clear to time, at law in force the settled sub-

entire amount received

scriptions constituted returnable for the which was taxpayer kept even its books returns on the accrual

and made its