Schuessler
v.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.May 19, 1955
24 T.C. 247 (U.S.T.C. 1955)

Docket No. 51326.

1955-05-19

E. W. SCHUESSLER AND ALINE SCHUESSLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

D.H. Markstein, Jr., Esq., for the petitioners. Homer F. Benson, Esq., for the respondent.


D.H. Markstein, Jr., Esq., for the petitioners. Homer F. Benson, Esq., for the respondent.

In 1946, petitioner E. W. Schuessler sold gas furnaces. Included in the purchase price of furnaces was a fee for his guarantee to turn on and cut off such furnaces for the next 5 years. He set up a reserve on his books to cover the cost of such service for the 5-year period. He kept his books and reported his income on the accrual basis. Held, the reserve for servicing the furnaces was not a proper deduction in computing income for 1946.

This proceeding involves a deficiency in income tax of $7,262.96 determined against the petitioners for the year 1946. The only issue is whether a reserve to cover the cost of servicing gas furnaces over a 5-year period was a proper deduction in computing petitioners' income tax for 1946.

FINDINGS OF FACT.

E. W. Schuessler (hereinafter referred to as the petitioner) and Aline Schuessler, his wife, were residents of Birmingham, Alabama, during 1946 and filed their joint income tax return for such year with the collector internal revenue for the district of Alabama.

Petitioner was in the business of selling gas furnaces in 1946. Included in the cost of furnaces which, petitioner sold in that year was a fee for turning on the furnace in the fall and cutting it off in the spring, which service he agreed to perform over the ensuing 5 years.

Petitioner kept his books and filed his tax returns on the accrual basis. On his books for 1916, he set up a reserve of $13,000 to cover the cost of such service over the 5-year period. He deducted $2,400 from the reserve in that year for the salary of a serviceman whom he employed to perform such work. On his return for 1946, he deducted the balance of the reserve, $10,600, from his gross sales to arrive at net sales in computing of income. Respondent disallowed the claimed deduction and determined the deficiency herein.

OPINION.

RICE, Judge:

Petitioner argues on brief that the method used in computing the amount of the reserve shown on his return was erroneous, and that the proper method would be to compute the cost of servicing the furnaces on the basis of $2 per call for a total of 10 calls for each furnace. He argues that this is a fixed and definite liability and that the amount of the reserve should, therefore, equal $20 multiplied by the number of furnaces sold, which would amount to approximately $13,000. This is the same amount he used on his return but reached by a different method. We think it is immaterial in this case which method he used in computing the reserve, for the reasons hereinafter stated.

The question presented here is whether a reserve for the cost of services to be performed in subsequent years is a proper deduction from income in the year when the contract to perform such services is made and payment therefore is received. This is essentially the same problem as the reporting of prepaid income in the year in which received for services to be performed in following years. The petitioner in fact, on brief, recognizes that the two problems are identical and cites Beacon Publishing Co. v. Commissioner, 218 F.2d 697 (C.A. 10, 1955), in support of his argument that the reserve here in issue was a proper deduction in computing his income in 1946.

In Curtis R. Andrews, 23 T.C. 1026, we considered the question of how prepaid income was to be reported, and specifically refused to follow the reasoning of the Court of Appeals for the Tenth Circuit in the Beacon Publishing Co. case. There is little which we can add to what we said there with respect to this question. We agree that the principle upon which the Andrews case was decided is not in harmony with generally accepted commercial accounting practices; but, on the other hand, a contrary result, such as the one reached in the Beacon Publishing Co. case, does not appear to us to conform to the firmly established ‘claim of right’ doctrine governing the receipt of income and its taxability in the year in which received. United States v. Lewis, 340 U.S. 590 (1951); North American Oil v. Burnet, 286 U.S. 417 (1932). While the issue posed here is the deductibility of a reserve for future expenses, the petitioner, in fact, is attempting to defer reporting the amount which he received in 1946 for services which he agreed to perform over the ensuing 5 years. He attempts to reach that result by taking the additional step of reporting the entire sales price of furnaces, including the amount for future servicing, and then setting up a reserve to cover the cost of such servicing and deducting it in computing his income for 1946. Thus, in effect, he cancels out the amount received and reported for such future servicing. The situation here is similar to the one before us in Your Health Club, Inc., 4 T.C. 385 (1944), where an accrual basis taxpayer sought to defer the reporting of prepaid income for services to be performed in the future. We held there that all sums received for future services were includible in income in the year in which received; and we conclude here that the $10,600 reserve was not a proper deduction to which the petitioners were entitled in computing their income for the year 1946.

Decision will be entered for the respondent.