Georgia School-Book Depository, Inc. v. Commissioner
1943 U.S. Tax Ct. LEXIS 252, 1 T.C. 463 (1943)
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Rule of Law:
Under the accrual method of accounting, income must be accrued and recognized in the year the right to receive it becomes fixed, not when it is actually received, unless there is no reasonable expectancy of payment due to a legal contingency or the debtor's insolvency.
Facts:
- Petitioner was a book broker that earned an 8 percent commission on all school books purchased by the State of Georgia through it.
- Petitioner's services included executing contracts with publishers, storing and distributing the books, and collecting payment from the state to remit to the publishers.
- The contract stated petitioner would receive its commission "at the time of settlement," when it collected payment from the state.
- Payment for the books and commissions came exclusively from Georgia's "Free Textbook Fund," which was funded by an excise tax on beer.
- During the taxable years 1938 and 1939, the Free Textbook Fund was insufficient to pay for all the books purchased, creating large deficits.
- Despite the deficits and payment delays, petitioner continued to facilitate the sale and delivery of books to the state.
- Petitioner accrued commissions on its college book sales, which were not funded by the state, at the time of sale.
Procedural Posture:
- The Commissioner of Internal Revenue determined a tax deficiency against the petitioner for the tax years 1938 and 1939.
- Petitioner challenged the Commissioner's determination by filing a petition with the Board of Tax Appeals, which is the court of first instance in this matter.
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Issue:
Under the accrual method of accounting, must a taxpayer accrue commission income in the year the underlying sales were made and services were rendered, even if payment is delayed because the debtor's designated fund is temporarily insufficient, so long as there is a reasonable expectancy of eventual payment?
Opinions:
Majority - Kern, J.
Yes. A taxpayer on the accrual basis must accrue income when the right to receive it becomes fixed, which occurs when the earning process is complete, provided there is a reasonable expectancy of payment. Here, the petitioner's right to the commissions became fixed when it performed the services and the book sales occurred. The court reasoned that under accrual accounting, it is the 'right to receive' income, not the 'actual receipt' of cash, that determines when income is recognized, citing Spring City Foundry Co. v. Commissioner. Petitioner had performed all necessary acts to earn the commission; the collection of money was merely the final, ministerial step. The delay in payment was not due to a contingency in the right to payment or the insolvency of the debtor, the State of Georgia. An exception to accrual is allowed only when there is no reasonable expectancy of payment, which requires a definite showing that a legal right makes receipt contingent or the debtor's insolvency makes it improbable. The court found that despite the temporary shortfall in the textbook fund, there was no reasonable doubt that the State of Georgia, with its vast resources and fiscal probity, would ultimately meet its obligations. The fact that petitioner continued to do business with the state further indicated its own expectation of eventual payment.
Analysis:
This case solidifies the core principle of the 'all events test' in accrual accounting for tax purposes. It establishes that a mere delay in payment or temporary cash flow problems of a solvent debtor is insufficient to defer income recognition. The decision creates a high bar for taxpayers seeking to invoke the 'no reasonable expectancy of payment' exception, requiring more than uncertainty about the timing of payment. This precedent forces accrual-basis taxpayers to distinguish between a right to income that is contingent and a fixed right to income where only the collection is delayed, impacting how businesses recognize income from sales to governments or other large, slow-paying but solvent entities.
