## Facts

- Pacific Grape Products Co., a California corporation, operated a fruit cannery with a seasonal “current pack” produced roughly July through November.
- It made most sales using a standard written contract form commonly used in the California canning industry.
- The company used a calendar year and the accrual method of accounting.
- On December 31 each year, it regularly:
  - billed customers for goods ordered but not yet shipped and still stored in its warehouse,
  - accrued the related sales income,
  - credited brokerage commissions on those sales, and
  - accrued inventory costs and estimated remaining costs to label, package, and prepare the goods for shipment.
- The Commissioner determined that this year-end accrual method did not clearly reflect income and reallocated:
  - billed-but-unshipped sales revenue to the later year when shipment occurred, and
  - related brokerage and estimated costs to those shipment years.
- The Tax Court sustained the Commissioner, reasoning that the sales were not complete because title did not pass until shipment.

## Issues

1. Whether the taxpayer’s consistent practice of accruing, at year-end, revenue and related expenses for billed, segregated, but unshipped goods clearly reflected income under the governing accounting-method provisions.
2. Whether, under the parties’ contracts and commercial practice, sufficient incidents of ownership passed by year-end (despite retained possession) to fix the taxpayer’s right to payment for accrual purposes.

## Decision

- The Ninth Circuit reversed the Tax Court.
- The court held the taxpayer’s year-end accrual method clearly reflected income and could not be displaced on this record.
- The court concluded that, given the contract terms, identification/segregation of goods, and invoicing, the sales were sufficiently complete by year-end for accrual even though shipment occurred later.
- The case was remanded for recomputation consistent with accepting the taxpayer’s method.

## Legal Principles

- The Commissioner may require a different accounting method only if the taxpayer’s method does not clearly reflect income; a consistent, reasonable accrual method may not be rejected merely because another method is preferred.
- For accrual-basis taxpayers, income is accruable when the right to receive payment is fixed and the amount is determinable with reasonable accuracy; shipment is not always the controlling event.
- When goods are produced, identified to the contract, billed, and segregated for specific buyers, and the contractual and commercial context shows the buyer has key benefits and burdens of ownership, the seller may accrue sales income before physical delivery.
- Matching sales revenue with associated costs and commissions in the same period supports a finding that the method clearly reflects income.

## Conclusion

The court rejected the IRS’s shipment-year reallocation and held that a cannery’s long-used practice of accruing year-end revenue and corresponding expenses for billed and segregated goods awaiting shipment could clearly reflect income where the contracts and commercial practice treated the sales as effectively completed by year-end.


Pacific Grape Prods. Co. v. Comm’r, 219 F.2d 862 (9th Cir. 1955)