## Facts

- North Texas Lumber Co., an accrual-basis taxpayer, owned timber lands and granted Southern Pine Co. an option to purchase at a stated price.
- Late in 1916, Southern Pine notified North Texas that it accepted the option and was ready to close and pay once North Texas prepared transfer papers.
- In 1916, North Texas did not prepare transfer papers, tender or transfer title, deliver possession, demand payment, or receive payment.
- The transfer of title and other closing steps occurred in early 1917, when the purchase price was paid.
- North Texas reported the gain as 1916 income; the Commissioner determined the gain was taxable in 1917.

## Issues

1. Under § 13(d) of the Revenue Act of 1916 and accrual accounting, did the purchase price accrue as income in 1916 upon notice exercising the option, or in 1917 when the sale was closed and paid?

## Decision

- The Supreme Court reversed the court of appeals and reinstated the Commissioner’s and Board of Tax Appeals’ treatment.
- The Court held the income did not accrue in 1916 because the buyer’s liability was not unconditional in that year.
- The gain accrued in 1917, when the transaction was completed through transfer/tender of title and payment.

## Legal Principles

- For an accrual-basis taxpayer, income is recognized when the right to receive payment becomes fixed and enforceable, not when future steps remain before liability is unconditional.
- Exercise of an option and a stated readiness to close, conditioned on the seller’s preparation of transfer documents, does not by itself create an unconditional obligation to pay that supports accrual.
- A taxpayer’s accounting method must clearly reflect income for the year; reporting a sale’s proceeds in a year when the sale was not completed and no unconditional receivable existed does not clearly reflect that year’s income.

## Conclusion

Because the buyer’s obligation to pay was not unconditional in 1916 and the parties did not complete the sale until 1917, the purchase price could not be accrued as 1916 income; it was properly taxable in 1917.


Lucas v. N. Tex. Lumber Co., 281 U.S. 11 (1930)