## Facts

- Spring City Foundry Company, an accrual-basis manufacturer, sold goods in 1920 to Cotta Transmission Company, creating an account receivable of $39,983.27 evidenced by an open account and unsecured notes.
- In December 1920, Cotta became financially distressed; a bankruptcy petition was filed and a receiver was appointed.
- Spring City charged off the entire receivable in 1920 and claimed a full bad-debt deduction for that year.
- The receiver later paid dividends to creditors: 15% in 1922 and 12½% in 1923; Spring City reported those dividends as income when received.
- The Commissioner disallowed any 1920 deduction and instead allowed a 1923 bad-debt deduction of $28,715.76 (face amount less dividends).
- The Board of Tax Appeals concluded the debt was not wholly worthless in 1920 but allowed a partial deduction for 1920 equal to $28,715.76.
- The court of appeals reversed, holding that the 1918 statute did not permit any deduction unless the debt was wholly worthless in the deduction year.

## Issues

1. Under the accrual method, must a taxpayer include the full sales price in gross income for the year of sale even if, during that year, the buyer’s debt becomes partially uncollectible?
2. Did § 234(a)(5) of the Revenue Act of 1918 permit a deduction in 1920 for the portion of a debt ascertained to be partially worthless that year?
3. If a partial bad-debt deduction was unavailable under § 234(a)(5), could the uncollectible portion be deducted in 1920 as a “loss” under § 234(a)(4)?

## Decision

- The Supreme Court affirmed the judgment for the Commissioner.
- An accrual-basis taxpayer must include in the year’s gross income the full amount of sales proceeds when the right to receive payment becomes fixed, even if the receivable is ascertained in that year to be partly worthless.
- Section 234(a)(5) in 1920 allowed deductions only for debts ascertained to be worthless and charged off within the year; it did not allow deductions for debts that were still recoverable in part with the recoverable amount uncertain.
- A taxpayer could not claim the uncollectible portion as a general “loss” under § 234(a)(4) because the loss and bad-debt provisions were treated as mutually exclusive.

## Legal Principles

- Under accrual accounting for federal income tax, the timing of income inclusion turns on the fixed right to receive payment, not on actual receipt or later collectability.
- Under § 234(a)(5) of the Revenue Act of 1918, a bad-debt deduction required ascertainment of worthlessness and a charge-off within the taxable year; partial worthlessness did not qualify.
- A deduction disallowed under the specific bad-debt provision cannot be recast as a loss deduction under § 234(a)(4) for the same economic event.

## Conclusion

For an accrual-basis taxpayer, sales income is included when the right to receive the sales price becomes fixed, even if collection later proves doubtful or only partial, and the 1918 Act did not allow a deduction in the sale year for a debt that was only partially worthless or for that portion as a “loss.”


Spring City Foundry Co. v. Commissioner, 292 U.S. 182 (1934)