## Facts

- Hallmark Cards, Inc. (and subsidiaries) was a calendar-year, accrual-method taxpayer that manufactured and sold greeting cards and related “social expression” products to thousands of retail customers.
- Hallmark sold “seasonal” merchandise tied to holidays, including Valentine’s Day items.
- Retail customers generally did not want Valentine merchandise on hand before year-end due to Christmas merchandising needs and year-end inventory concerns.
- To accommodate customers, Hallmark shipped Valentine merchandise in November–December of Year 1 but used sales terms providing that title and risk of loss would not pass to customers until January 1 of Year 2.
- Hallmark treated the advance-shipped Valentine goods as its inventory through December 31 of Year 1 and reported the related sales income in Year 2, when title and risk of loss passed.
- The IRS asserted that Hallmark had to accrue the income in Year 1 (the year of shipment) and determined income tax deficiencies for 1975–1978.
- The case was submitted on stipulated facts; after concessions, the timing of income from Valentine merchandise shipments was the sole dispute.

## Issues

1. Under the accrual method and the “all events” test, must income from Valentine merchandise shipped in Year 1 be accrued by December 31 of Year 1, or may it be accrued in Year 2 when title and risk of loss pass?
2. Did Hallmark’s deferral practice constitute an impermissible “hybrid” accounting method inconsistent with accrual accounting and the clear-reflection-of-income requirement?

## Decision

- The Tax Court held for Hallmark.
- The court concluded the all-events test was not satisfied until Year 2 because Hallmark’s right to the sales proceeds was not fixed until title and risk of loss passed on January 1.
- The court rejected the Commissioner’s argument that Hallmark used an impermissible hybrid method of accounting.

## Legal Principles

- Under the accrual method, income is includible when (1) all events have occurred that fix the right to receive the income and (2) the amount can be determined with reasonable accuracy.
- Where sales terms validly defer passage of title and risk of loss, the taxpayer’s right to income may remain unfixed until the agreed transfer date, even if goods are physically shipped earlier.
- Contract terms governing title and risk of loss are respected for timing purposes when supported by bona fide business reasons and followed in practice, rather than serving as a sham.
- Deferring accrual to the time the right to income becomes fixed under the governing sales terms is not, by itself, a “hybrid” accounting method if applied consistently and consistent with accrual principles.

## Conclusion

The Tax Court held that Hallmark was not required to accrue income from advance-shipped Valentine merchandise in the year of shipment because its contractual terms deferred title and risk of loss until January 1 of the following year, delaying satisfaction of the all-events test; this treatment did not constitute an impermissible hybrid accounting method.


Hallmark Cards, Inc. v. Commissioner, 90 T.C. 26 (1988)