American Automobile Assn. v. United States

367 U.S. 687, 81 S. Ct. 1727, 6 L. Ed. 2d 1109, 1961 U.S. LEXIS 2105
CourtSupreme Court of the United States
DecidedOctober 9, 1961
Docket288
StatusPublished
Cited by286 cases

This text of 367 U.S. 687 (American Automobile Assn. v. United States) is published on Counsel Stack Legal Research, covering Supreme Court of the United States primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
American Automobile Assn. v. United States, 367 U.S. 687, 81 S. Ct. 1727, 6 L. Ed. 2d 1109, 1961 U.S. LEXIS 2105 (1961).

Opinions

Mr. Justice Clark

delivered the opinion of the Court.

In this suit for refund of federal income taxes the petitioner, American Automobile Association, seeks determination of its tax liability for the years 1952 and 1953. Returns filed for its taxable calendar years were prepared on the basis of the same accrual method of accounting as was used in keeping its books. The Association reported as gross income only that portion of the total prepaid annual membership dues, actually received or collected in the calendar year, which ratably corresponded with the number of membership months covered by those dues and occurring within the same taxable calendar year. The balance was reserved for ratable monthly accrual over the remaining membership period in the following calendar year as deferred or unearned income reflecting an estimated future service expense to members. The Commissioner contends that petitioner should have reported in its gross income for each year the entire amount of membership dues actually received in the taxable calendar year without regard to expected future service expense in the subsequent year. The sole point at issue, therefore, is in what year the prepaid dues are taxable as income.

In auditing the Association’s returns for the years 1952 through 1954, the Commissioner, in the exercise of his discretion under § 41 of the Internal Revenue Code of 1939,1 [689]*689determined not to accept the taxpayer’s accounting system. As a result, adjustments were made for those years principally by adding to gross income for each taxable year the amount of prepaid dues which the Association had received but not recognized as income, and subtracting from gross income amounts recognized in the year although actually received in the prior year. A net operating loss claimed for 1954 and corresponding carry-back deductions were greatly reduced, and tax deficiencies were assessed for 1952 and 1953. Petitioner paid the deficiencies and its timely claim for refund was denied. Suit to recover was instituted in the Court of Claims, but the court sustained the Commissioner,-Ct. Cl.-, 181 F. Supp. 255. Recognizing a conflict between the decision below and that in Bressner Radio, Inc., v. Commissioner, 267 F. 2d 520, we granted certiorari. 364 U. S. 813. We have concluded that for tax purposes the dues must be included as income in the calendar year of their actual receipt.

The Association is a national automobile club organized as a nonstock membership corporation with its principal office in Washington, D. C. It provides a variety of services2 to the members of affiliated local automobile clubs and those of ten clubs which taxpayer itself directly [690]*690operates as divisions, but such services are rendered solely upon a member's demand. Its income is derived primarily from dues paid one year in advance by members of the clubs. Memberships may commence or be renewed in any month of the year. For many years, the association has employed an accrual method of accounting and the calendar year as its taxable year. It is admitted that for its purposes the method used is in accord with generally accepted commercial accounting principles. The membership dues, as received, were deposited in the Association’s bank accounts without restriction as to their use for any of its corporate purposes. However, for the Association’s own accounting purposes, the dues were treated •in its books as income received ratably3 over the 12-month membership period. The portions thereof ratably attributable to membership months occurring beyond the year of receipt, i. e., in a second calendar year, were reflected in the Association’s books at the close of the first year as unearned or deferred income. Certain operating expenses were chargeable as prepaid membership cost and deducted ratably over the same periods of time as those over which dues were recognized as income.

The Court of Claims bottomed its opinion on Automobile Club of Michigan v. Commissioner, 353 U. S. 180 (1957), finding that “the method of treatment of prepaid automobile club membership dues employed [by [691]*691the Association here was,] ... for Federal income tax purposes, ‘purely artificial.’ ” 181 F. Supp. 255, 258. It accepted that case as “a rejection by the Supreme Court of the accounting method advanced by plaintiff in the case at bar.” Ibid. The Association does not deny that its accounting system is substantially identical to that used by the petitioner in Michigan. It maintains, however, that Michigan does not control this case because of a difference in proof, i. e., that in this case the record contains expert accounting testimony indicating that the system used was in accord with generally accepted accounting principles; that its proof of cost of member service was detailed; and that the correlation between that cost and the period of time over which the dues were credited as income was shown and justified by proof of experience. The holding of Michigan, however, that the system of accounting was “purely artificial” was based upon the finding that “substantially all services are performed only upon a member’s demand and the taxpayer’s performance was not related to fixed dates after the tax year.” 353 U. S. 180, 189, note 20. That is also true here.4 As the Association’s own accounting expert testified:

“You are dealing with a group or pool. Any pooling or risk situation, particular members may in a particular year require very little of a specific service that is rendered to certain other members. I wouldn’t know what the experience on that would be, but I would think it would be rather irregular between individual members. ... I am buying the [692]*692availability of services, the protection .... Frankly, the irregularity of the actual furnishing of the maps and helping you out when you run out of gasoline and so on, I frankly don’t think that has a blessed thing to do with the over-all accounting.”

It may be true that to the accountant the actual incidence of cost in serving an individual member in exchange for his individual dues is inconsequential, or, from the viewpoint of commercial accounting, unessential to determination and disclosure of the overall financial condition of the Association. That “irregularity,” however, is highly relevant to the clarity of an accounting system which defers receipt, as earned income, of dues to a taxable period in which no, some, or all the services paid for by those dues may or may not be rendered. The Code exacts its revenue from the individual member’s dues which, no one disputes, constitute income. When their receipt as earned income is recognized ratably over two calendar years, without regard to correspondingly fixed individual expense or performance justification, but consistently with overall experience, their accounting doubtless presents a rather accurate image of the total financial structure, but fails to respect the criteria of annual tax accounting and may be rejected by the Commissioner.

The Association further contends that the findings of the court below support its position. We think not. The Court of Claims’ only finding as to the accounting system itself is as follows:

“22.

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Bluebook (online)
367 U.S. 687, 81 S. Ct. 1727, 6 L. Ed. 2d 1109, 1961 U.S. LEXIS 2105, Counsel Stack Legal Research, https://law.counselstack.com/opinion/american-automobile-assn-v-united-states-scotus-1961.