## Facts

- Clifton Manufacturing Company, a textile mill, kept its books and reported income on the accrual method.
- Clifton’s selling agent, Hunter Manufacturing & Commission Company, maintained an open account with Clifton on which interest was charged on debit balances.
- In Clifton’s fiscal year ending March 31, 1933, Hunter entered receivership for liquidation, owing Clifton about $392,651.14 in principal, and creditors initially expected only about a 50% recovery.
- During the next fiscal year, prospects improved and full payment to creditor mills seemed increasingly likely.
- Clifton ultimately recovered the full principal and, in its fiscal year ending March 31, 1937, received $11,711.76 in past-due interest attributable to interest for fiscal years ending March 31, 1933 ($302.19) and March 31, 1934 ($11,409.57).
- Clifton did not report the interest in 1937 or in the earlier years to which it related.
- The Commissioner included the $11,711.76 in Clifton’s 1937 gross income, determining income and excess profits tax deficiencies; the Tax Court sustained the Commissioner.

## Issues

1. For an accrual-basis taxpayer, whether past-due interest collected in 1937 had to be included in 1937 gross income or instead accrued and reported in 1933 and 1934 when it became due.
2. Whether, given the debtor’s receivership and changing recovery prospects, the interest was “properly accruable” in the earlier years because collectibility was then reasonably assured.

## Decision

- The Fourth Circuit affirmed the Tax Court.
- The court held that the Commissioner properly taxed the $11,711.76 of past-due interest in Clifton’s fiscal year ending March 31, 1937.
- The court concluded that Clifton was not required to accrue the interest in 1933 or 1934 because, on these facts, collectibility in those years was not sufficiently assured to compel accrual.

## Legal Principles

- Under the accrual method, income is included when the right to receive it becomes fixed and the amount is determinable with reasonable accuracy, coupled with reasonable assurance of collection under the circumstances.
- Contractual due dates alone do not require accrual where there is serious doubt about collection, such as when the debtor is in receivership and recovery is uncertain.
- A taxpayer may not avoid tax by asserting that income belongs to earlier years closed by limitations when, in those earlier years, the conditions for accrual (including reasonable certainty of collection) were not met.

## Conclusion

Because Hunter’s receivership and the initially expected partial recovery made collection of interest uncertain in 1933 and 1934, the interest was properly included in income when collected in 1937, and the deficiencies for that year were sustained.


Clifton Mfg. Co. v. Commissioner, 137 F.2d 290 (4th Cir. 1943)