## Facts

- Chicago White Sox, Inc. operated a professional baseball club and used the accrual method of accounting.
- Before May 31, 1962, Artnell Co. acquired all of the stock of Chicago White Sox, Inc., liquidated it on May 31, 1962, and continued the business, assuming its assets and liabilities.
- The club received advance payments from season ticket sales, advance single-game admissions, broadcasting/television revenues for future games, and season parking books.
- On May 31, the balance sheet carried as “deferred unearned income” the portion of advance receipts allocable to games and related services to be performed after May 31.
- As later games were played, Artnell recognized the corresponding portion of the deferred amounts as income.
- For the short taxable year ending May 31, 1962, the return (filed by Artnell as transferee) excluded the deferred unearned income from gross income.
- The Commissioner determined the deferred amounts had to be included in gross income for the short year and asserted deficiencies.
- The Tax Court sustained the Commissioner’s determination.

## Issues

1. Whether an accrual-method taxpayer must include in gross income, in the year of receipt, advance ticket sales and related prepayments for services to be performed at later scheduled baseball games.
2. Whether the Commissioner abused his discretion in rejecting the taxpayer’s deferral method as not clearly reflecting income.

## Decision

- The Seventh Circuit reversed the Tax Court and remanded.
- The court held the taxpayer was not required, on these facts, to include the advance payments in income in the year of receipt.
- The court concluded the Commissioner abused his discretion by disallowing deferral where performance was tied to a fixed schedule of games and deferral could more accurately match income with performance.
- On remand, the Tax Court was directed to determine whether the taxpayer’s specific allocation/deferral method in fact clearly reflected income in the later period(s) when games were played.

## Legal Principles

- Under the accrual method, timing should reflect when income is earned, subject to statutory and administrative limits on permissible accounting methods.
- The Commissioner may require a method that “clearly reflects income,” but that discretion is reviewable and may be set aside for abuse.
- Cases requiring year-of-receipt inclusion of advance payments commonly involve substantial uncertainty about whether and when future services will be performed.
- A limited exception permits deferral of advance payments when the taxpayer can show substantial certainty of performance on fixed, ascertainable dates and that deferral provides a clearer reflection of income than immediate inclusion.

## Conclusion

The Seventh Circuit held that advance receipts for scheduled baseball games and related services could be deferred by an accrual-basis taxpayer where performance was sufficiently certain and deferral better reflected income, and it remanded for the Tax Court to evaluate whether the taxpayer’s particular deferral method clearly reflected income.


Artnell Co. v. Commissioner, 400 F.2d 981 (7th Cir. 1968)