# Petition for Writ of Certiorari — Streight Radio & Television, Inc. v. Commissioner (No. 507) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386420_1016%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1960 ## Text . e COPY . | Office Sueme Court US. FILes OCT 25 1950. a- DIN Th, JAMES R. BROWNING. Clerk > SUPREME COURT UF THE UMPED SFATES . OCTOBER TERM, 1960 No. 50 7 ePREIGHT RADIO AND TELEVISION, INC. > Patitiom ar es COMMISSIONER OF INTERNAL REVENUE, Respond nt >. PETITION FOR WRIT OF CERTIORARI TO THE ; UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT ALFRED [2 SCANLAN, P . CEE i tteenth Street, VIE: Washington 3. ]). e* Jounedde ( MELAnA,: 512 Indiana Bielding, Indianapolis th, Lidiana, lore ys tor Petitioner, Filed: Ocronen 2), 1960. TABLE OF CONTENTS Opinions Below Jurisdiction Question Presented Statutes Involved Statement of the Case 1. Proceedings Below 2. Findings and Decision of the Tar Court 3. The Taxpayer's Operating Experi ne: 4. The Deferral of Income d. The Opinions Below einai for Granting The Writ Conclusion 7 Appendix A Appendix B Appendix C CITATIONS Cases: ’ Ame ‘can Automobile Association v. United States, 181 F. Supp. 255 (Ct. CL, 1960), cert. granted, No. -288, 1960 Term Automobile Club of Michigan v. C sa secgeoibde rol lu. ternal Rev enue, 20 T.C. 1035 (1993), PF. 2d os (CLA. 6, 1956), att’. 353 U.S. 180 (1957) > # AD, selenite Club of New York vi € ommissioner, 32 T.C. 906 (1959) Bayshore Gardens, Inc. v. Commissioner of Internal Revenue, 267 F.2d 55 (CLA. 2. 1999) Bressner Radio, Inc. v. Commissioner of Internal Revenue, 267 F.2d 520 (C. A.2 2, 1959) wis ists = Dade WS New Jersey Automobile Club v. nited States, 11. F. Supp. 259 (Ct. CL. 1960), pet. for cert. filed June 11, 1960, No. 140, 1960 Term —2590-8 ° - il INDEX Statutes: Section 41, ‘Internal ae enue Cede of 1939 Section 446(b), Internal Mevenne Code of 1954 Nisce eens Rey. Rul. 60-85, 1960, IRB-10, ps 14 ae IN THE - SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1960 | No. STREIGHT RADIO AND TELEVISION, INC. : : Petitioner, . ot COMMISSIONER OF INTERNAL REVENUE, Respondent PETITION FOR WRIT OF CERTIORARI .TO THE UNITED STATES COURT OF APPEALS FOR THE | SEVENTH CIRCUIT Pe titioner prays that a writ of ce rtiorari issue to review be judgment of the United States Court of Appeals for the Seventh Cireuit entered in the above-entitled case on July 28, 1960. s. ae *’ Opinions Below The opinion of the Tax Court, printed in Appendix A attached: hereto, is reported at 33. T. C. 127. The opinion of the Court .of ‘Appeals, printed in Appendix B attached hereto, is reported at VSO F. 2d 883. (1) ra te : ee Jurisdiction The jurisdiction of this Court is invoked under 2s U SL. 1254(1). The judgment of the-C ourt of Appeals Was eh- . ren on July 28, 1960. . ’ » Question Presented ° Petitioner, an accrual basis taxpayer, deferred amounts charged for servicing contracts on television sets sold, in proportion to the number of montlis the contracts entered » into during the taxable year would extend into the follow- ing year. The Commissioner, coltending that petitioners method of accounting did not clearly reflect income, changed the taxpayer's method of accounting, disallowing pel tioner’s deferral of such charges. The Court below, Ke ject: ing a contrary result reached by the Seeond Circuit on . identical faets, upheld the Tax Court in sustaining the Commissioner's action on the basis ef what it presumed to be the controlling authority of 4 utomobile Club of Mick gan v. Commissioner of Internal Revenue, 353 U.S. 1s. These basie facts present for decision in this case the ques: »tion of whether the Commissioner can change a method of accounting of an-acerual basis taxpayer under which in: come is deferred te the period in which it is earned and in _ which, based on thé taxpayer's operating experience, the expenses of producing that income are to be ineurred. a Statutes Involved _ . ; Section 41, Internal Revenne Code of 1989, and. section 446(b), Internal Revenue Code of 1954, printed i in Appendix C attached her eto, Statement of the Case 1. Proceedings Below. This case comes to this Court from the affirmance by the Court of Appeals for the Seventh Circuit of a judgment of the Tax Court of the United States determining a deficiency in income taxes of the petitioner for the taxable year énded October a1, 1950 in the amount of ~— 82. , 2. Findings and Decision of . bY 22 petitioner's income tax returns for the fiseal periods ended October 31, 1949,-1950 and 1951. While the charges for the service contracts varied in amount from $65 to $100, most of the contracts, were sold’ for 865. The list prices of the sets varied from $249 to $725. The charges for the serviee contracts had - heen ineluded in total sales without allocation. - Goedecke computed the amount of income from the service contracts to be deferred in the following manner. It was: deter- mined that the service contract charge, on the average, constituted 14.7 per cent of: the total price. This computa tion was made without weighine the different total prices according to the relative quantity of each type of -reeciver sold. Goedecke then teok 1 oper cent af each month's total sales as representing amounts charged for the serv” iee contract. Antenna and labor costs of installation, cov: fred by the serviee contract, were estinuited to be S$22.50 per set installed, or almost one-third of $65, which was assumed to be the total amount eharged: for the sery jee contract. The amounts charged for the service contracts for cach month were aceordingly reduced by one-third, on the theory that the amount of $22.50 of the t65 charged for the contract represented income earned af the time of ‘installation. The remaining balance for each mouth, which thus equaled ten per cent of television sales for the month, was then divided by 12. the serviee contract period. in months, and the cesultine monthly figure was multiplied by the number of months the serviee eontract. woulk re main in-etfeet after the close of the fiscal vear. The tets! of these feures was then deferred as unearned ineonse: During the taxable vear. petitioner’. television 2.64642 Post wos 2 - B82 14 Feb. = 107.203 60) 16,080 54. 5.360 220 MT20 520 NHS 86S BRD 09 Mar, 87.972 77 13.195 OEY 4.308 TE S797 2000 738 IO 2982 42 Apr. C5175 68 OW TTBS BERT SIT Ot SS Oe 2.715 65 May 52.02 35 7S 85 2.O81 65 528 UO BS 6 6 2.631 61 June 42.818 65 6.42279 2H OU F.28I SE S5682 0 TB 4UT 74 July 61.621 5S 92S 2ST ROSE GGL TZ IS SL 84108 OR, \ug. 81.861 70 9 12.2725 $003 00 S INH 16 6S2 18 4 6.1389 62 Sept, M$. 313 BR. RUT OO 4.665.088 881 B20 TTT HL 7.978 10- Vet 1OT.T20. TH GSO GE 5.386 GE 1077S OO NNT TK OTL W875 25 $1.04] 649 50 $156 247 AT 852.082 94 S1OF 164 15 $43.471 33 ”* Headings of columns added or clarified. n its return for the taxable vear, petitioner deferred the amount of S43 471.05 charged for service contracts. hy ineluding that amount in its cost “of eeods sold. In his notice of deficienev, respondent determined ‘that the deduction fer service guarantee ° * * ereated by setting up a contingent lability aecount * * ° ts net an allowable: deduetion * * *** and increased petitioner’s-income accord. ingly. Incconsideration of the amounts charged by petitioner for the service contracts, petitioner was obligated tp re nder any of the services required over the periods provided hy the contracts. Since seme af these periods extended into the subsequent taxable vear, petitioner was obligated to that extent to render services beyoud the taxable veay. Because ten per cent of petitoner’s sales were made without serviee contracts, the amount deferrable according io petitioner's theory as representing petitioner's future obligations, $43,471.33, should be reduced by ten per cent, ‘to the figure of $89.124.20. For Ese sme reasoh, while tale pe sales as of the end of the year totaled S2S7.049.50, only the amount of -$2: 58384.3 of sugh anles —s : 24° are found to have been made with service contracts. Boe- cause, after exclusion of the antenna installation charges. the aniount deferred represented ten per cent of sales, ap- plying the same percentage “to uncollected sAles, only $25,834.44 of the amount deferrable by petitioner's the- ory (corrected to $39,124.20) was uncollected as of. the end of the year.. The difference between the amount actu- ally deéferred, @%8,471.32, and: dhe uneolleected amount, $20,854.44, or $17,626.50, whs received during the taxable year without restriction as to use. ie / At the time of entering into the service contracts, peti-. tioner acquired oa substantially fixed and ‘unconditional right to receive the amounts chareed therefor. ’ e 4° eS When petitioner téok over the business of the sole pro prictorship-of Strbieht, it accepted accounts receivable in the amount -of £4,800 representing service charges and mis- ~ eotlancous accounts, On Aneust 1, 1949, accounts regeiv- - able were increased to #602057, the additional, $1,220.57 representing advances to Streight. "Petitioner’s balance sheet as of October 31, 1949, did not list a reserve for bad debts, During vetitionor’s fiseal period ended October 31, 1942. “it discounted its contracts receivable with recourse with the Connneretal Credit: Company. The predecessor propiie- ~torship had also followed this practice and. petitioner had. assumed the proprietorship's liabilities to the Commercial Credit Company, Petitioner was required to purchase back from the credit company an undetermined number. of these contracts representing sales made by Streight Jin his individual proprietorship prior to incorporation, When. customers failed to make paynients. When contracts Were so returned to petitioner, it would repossess the sets, and sell them at their fair inarket value. , In preparing petitioner's income tax return for the fiseal eriod end October 31, 1949, Goedecke did not establish 7 a bad debt reserve because he did not know of any bad debts incurred by -petitioner for that period. At the time 7 * aan 7) of the trial, petitioner did not have available any records of bad debts it may have incurred prior to Mareh 1, 1950. During the taxable vear, petitioner carried its contracts receivable itseff instead of discounting them with a conr- meretal house. Since Marel. 1, 1950, petitigner has main- tained a daily sunvnary sheet which ifteluded the day's receipts for cash and contract sales and services and also any **charge-offs”’ due to returned mere ‘handise, bad debts, and miscellaneous reasons. These charge-offs were applied to the dail®@ receipt totals and the resulting figure was re- corded on petitioner hooks as the.daily sales figure. This figure was-entered ona monthly summary, the totals of which werg posted to the ledger. During the taxable year, nos} Tite bad debts we re charged on petitioner's hooks to its bad debt account” When a television set was repossessed for failure to make payments, the balanes owing on that account was written off by the making of an Approper ate journal credit; this amount was then charged against sales on the daily stmimary: sheet, thus reducing daily sales by the amount uncollected, Tf a repossessetl set was sold, the sale was entered in the sales account at the price for which the set Was then sold. Phvariably, the fam market value of a re- possessed set was less than the balance owing on it, and usually’ losses were realized on sneh transactions. Upon repossession or resale of a set, its then fair maftket value Was not recorded’ at its cost; instead, costs of merchan- dise sold were determined by taking inventory at the end of the year. The result of this “wethod of recording the repossessions and resales was that any losses resulting therefrom were refleeted in-a corresponding reduction in daily sales, and thus ineome. ae gi. On October 31, 1950, petitioner's contracts receivable totated $287,049.30, On that date, Goedecke set up a re- serve for bad debts on petitioner’. books by making en- tries to a bad debt expense account and to the reserve in amounts equal to five per cent of the ontstanding con- tracts receivable, or $14,952.46. The reserve for the following vear was also computed at i 26 . a rg rn » —- five per cent of outstanding contraets receivable: the amount by which _the reserve Was _reduced accordingly ” was taken into income for that year. é . Otaee o , } Issue 1 Petitioner contends t! at responde ut erred in ieethindit the amount deferred in gross income of the taxable veu on the ground that it represented unearned and unreceives| income, that the deferral thereof cle: irly refleeted income, in accordance with the anethod of accounting re ‘eul: ily em ploved,' and further, that its inclusion results in a distor tion of lucome, because the eXpenses incident therete shad not yet been incurred. Respondent contends that Nie amount deferred. was preperly ‘ineludible in income of the taxable vear because received nider a ‘claim of right” -without. any Say gona as to its use, Automobile Clad, of iia he eh LO (1953), affd. 880 FL 2d Js (CLA. 6, 1946), affd. as U.S. 180 (1957). While we do not agree with respondent that the entire ' The relevant statutory provisions of the Internal Revenue Cote. 1939 are the foliowing sections : Sec. 41+ General Rule. m4 The net income shall be computed upon the. basis of the tanner a.aual accounting period (fiseal year or calendar vear, as the ease be) in aceordance with the method of accounting re gularly eripeler eel “Keeping the books of such taxpayer; but if no such method of ges! ing has been So employed, or if the method emploved does not eles! reflect the income, the vémputation shall be made in aceordanes wt sueh method as in the opinion of the Commissioner doe. clearly reflect the income. *, * ° See.42. Pernod in Which Items of Gross Income Jneluded- (a) General Rule-—The amount of all items of gross imeome shal! included in the yvross income for the taxable vear in whch received | the taxpayer, unless under methods of accounting permitted under seetu 41, any such amounts gre to be properly accounted for as of a different period. r , All references to sedtions are to sections of the Internal Revenue ¢. of 1939. Pm “amount was received defring the vear,oawe do agree that it is ineludible cin income tor the taxable vear. ; ; Petitioner ceferred the amount of S43. 471.228 as unearned income from service evantract>.. We have found that onty the amount Of S30, 224.20 represented amounts charged for - service contracts; accordingly, the ditference, in the aumount of $4,347.13, isnot deferrable, according to pMtitioner’s theory, or In amy event, and we are hes re concerned. ot ly with the corres ‘tel amount of 829 ae Both- “parties hides aes stared tht Mie qnestiogn Gf whether ar not the amount was reeeived during Yhe tan: uae Vihar isof paramount importance in deeklite whether the anrnaount is properly aecruable accordingly. we buave made findine _° e e ° e :. . A taxpayer using the reserve method should make a statement in his return.showing the vqlume of his charge sales (or other business tran-- actions) for the vear and the percentage of the reserve to such ampunt. the total amount of notes and accounts receivahle at the beginning and the close of the taxable year, and the amount of the debts which have beeome ‘wholly or partially worthless and have been charged against the reserve account. 32 dition to the reserve... Regulations 111, see. 29.9 3(k)-1(a), supra, footnote 2. Petitioner has neither ‘requested nor obtained such* permission. further, since the record discloses affirmatively that such repossessions and resales did occur during the tax. able year, petitioner has in_ effect deducted specific bad debts throygh the corresponding reduction in daily sales for such year. The statute and relevant reg- ulations provided the general rule that a direct deductiou for bad debts, and a deduction for ai addition to the re- serve are allowed only in the alternative. Even assuming, arguendo, that petitioner neither incurred nor deducted bad debts in the preceding fiscal period, so that the «ues- tion of obtaining permission for a change in method is not present, petitioner has suggested no reason nor introduced evidence to suggest any reason why an — to the general rule should be made. . We hold that petitioner has failed to prove that it is en- titled to a deduction for an addition.to the reserve, or to any further deduction for bad debts for the taxable year. Decision will be entered for the respondent. 33 APPENDIX B Oprxton or THE Unxtrep States Court oF APPEALs- FoR THE SEVENTH Circuit Before Hastings, Chief Judge, Durry and ScunackeEn- neRG, Circuit Judges, SCHNACKENBERG, Circuit Judge. Streight Radio and Tele- vision, Inc. an Indiana corporation, petitioner, seeks a review of a decision of the Tax Court of the United States, 33 T.C’. , that there is a deficiency of $14,245.82 in in- come tax owing by petitioner for the fiseal year ending > October 31, 1950. The basie facts are not in dispute. During the taxable’ year, petitioner was engaged in the business of selling television sets and of servicing the sets sold. a Most of the sets sold by petitioner were designed by their manufacturers so that, every 2..to 6 months, the chassis would have to be removed, wu the tuners, lass, and picture tube cleaned. Petitioner rendered this service upon call by its customers. Less than 100 of the several thousand sets sold during the taxable year did: not require ° service of one kind, or another, In addition to its advertised list price, petitioner offered an ‘Installation and Service Contract’’ for an additional consideration, which varied in amount from $65 to $100, depending on the make and model of the receiver. sold. -* Petitioner added the charge for the service contract to the list price to arrive at a single total Sales price for the set. The customer was also given a sales ticket, which reflected the total: sales price, as a receipt. A delivery card was made up for each television set sold during the taxable year. Respondent's agents examined 25 sales tickets which represented 2 days* sales; 18 of these tickets did not con- / tain any reference to any warranty, However,.5 of these > latter 18 tickets were checked by respondent's agent against re - 34 : the corresponding 5 delivery cards; 1 of those delivery cards showed a 90-day service and parts warranty, with a I-year warranty on the picture tube, another disclosed a **coupon’” warranty, 1 showed a 1-year parts. warriinty, and 2 provided fora 1-year service warranty, Respondent's agent examined the delivery ecards for customers with initials A through BE, approximately 200 cards. All but ~2 of these delivery cards disclosed a 1-year service war- ranty. Of those 22 cards, 1 did not record any warranty, 1 recorded a 1-year parts warranty,,.and 20 diselosed {). day warranties, either’ on parts or service, or on both. A few sets sold for cash were sold without any service contracts. All but 10 per cent of the sets sold by petitioner during the year in question were sold with a l-year service contract. aS ae , Petitioner’s main purpose in offering’ the service con- tracts was to induce potential customers to purchase their sets from it. Petitioner was not in the business of servic. ing, and it did not service television sets sold by other concerns, as it knew from the experience of such com- petitors that such a service business was not profitable. . Louis Goedecke, an accountant, made monthly posting entries from monthly summaries to the general ledver of petitioner, arid prepared petitioner's income tax returns. The charges for service contracts having been included in total sales without allocation, Goedecke computed — the amount thereof to be deferred, in the manner indicated in the footnote.' iwi the charges for the service contracts varied in amount from . $65 to $100, most of the contracts were sold for #65. The list prices of the sets varied from $249 to $725. It was determined that the service contract charge, on the average, constituted 14.7 per cent of. the total price. This computation was made without weighing the different tor “prices according to the relative quantity of eath type of reeeiver It is true ‘that thee acts of Congress taxing - income oF consistently” laid the tax upon the net income received by or acerued to. the taxpayer ina ‘taxable year,’ Which is either the calendar year or a different fiscal vear, as the taxpayer may elect.» But they. have never undertaken to-limit,the income tax? able in any one year to that derived from the taxe payer's activities occuring in that or any-other single vear. The items of gross income and of allowed de- ductions to be included in the income return, are those" of the taxpayer for his taxable vear, even though they may have resulted from or be affected by his business transactions of other vears, ° °°" It, instead of acsvstem of annual accounting, a basis of finally ascertained resilts of partieular transactions is to “be substituted, € ongress and not the courts: must previde “it, Burnet ve Sanford & Brooks Co 282 US2 359, 367: Baird vo Commissioner, 256 F.2d O18, O24) affirmed, 360 US: 446. For the reasons herein exp iressed, the decision of the Tax Court is aftirmed. ; > a) . 40 APPENDIX C_ “ets Section 41 of the Internal Revenue Code ot 1ey9 The net income shall be computed .upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of aecounting regularly employed. in keeping the books of such taxpayer; but if no such method of account. ing has been ‘so employed; ‘or if. the method émploved does not clearly reflect the incofie.’ the computation shall be nfade in accordance with such method as‘in the opinion of the Commissioner does clearly reflect the income. I! the taxpayer's annual accounting’ period is other thar a fiscal year as defined in Seetion 48 or if the taxpayer ha- ho annual accounting period or does not keep books, the vet income shall be computed on the basis of the calendar vear. Section 446 of the Internal Revenue Code of, 19934 fa) General rule Taxable income shall be comiprited Under the method of accountitig on the basis of which the taxpayer crecularly computes his income in keeping his books. (bh) Exceptions. —If no method of accounting has her regularly used by the taxpayer, or if the method used does hot clearly retleet income, the computation of taxable ir come shall be made uiider such method as. in the Opinio of the Secretary or his delegate, does clearly veflect ir COLL, , : 0 (¢) Permissible methods. —Subject to the ‘provisions o! subsections (a) and ¢b), a taxpaver may compute taxable income wider any of the following methods of accounting (1) the cash receipts and disbursements method: (2) an acerual method; (3) any other method permitted by this chapter; o (4) any combination of the foregoing methods pertmiitted under revulations prescribed by the Secretary or his dele wate. a 41 (d) Taxpayer engaged in more -than one business. A taxpayer engayed in more than one trade or business may, in computing taxable income, use a different method of accounting for each trade or business. (e) Requirement respecting change of accounting method. Except as otherwise expressly provided in this chapter, & taxpayer who changes the method of accounting on the basis of which he regularly computes his income in keeping his books shall, before computing his taxable in-’ come under the new method, secure the consent of the Secretary or his delegate. 3 (2590-8) --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386420_1016%3A2. Public record. Not legal advice.