Schuessler v. Commissioner
case brief
CASE SYNOPSIS: Petitioner
taxpayers sought review of a decision by the Tax Court which
disallowed a deduction representing a reserve set up by petitioners
while keeping their books on the accrual basis, to represent their
estimated cost of carrying out a guarantee, given with each of the
furnaces sold by them during the year, to turn the furnace on and off
each year for five years.
FACTS: Petitioner taxpayers were in the gas furnace business in 1946, during which they sold 665 furnaces, each with a guarantee that they would turn the furnace on and off each year for five years. The taxpayers testified to keeping their books on the accrual method and claimed that the only way their income could be accurately reported was by charging against the cost of furnaces sold in 1946 the reserve representing the amount which they became legally liable to expend in subsequent years in connection with the sales. The Tax Court disallowed the deduction representing the reserve. The court reversed and held that petitioners' method of accounting came much closer to giving a correct picture of their income than would a system in which they sold equipment in one year and received an inflated price because they obligated themselves to refund part of it in services later, and that it did not offend any statutory requirement. The record supported petitioners' contention there was a legal liability when the purchase price was paid, that the cost of such service was established, and that the extra payment by the purchasers proved their intention to call upon petitioners for the service.
CONCLUSION: The court reversed the judgment, which disallowed petitioner taxpayers' deduction for a reserve account set up to cover the cost related to guarantees to service furnaces sold. The court held that petitioners' accrual method of accounting was closer to giving a correct picture of their income than a system in which they sold equipment in one year and received an inflated price because they were obligated to refund part of it in services later.
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230 F.2d 722, 1956 U.S.
App. 56-1 U.S. Tax Cas. (CCH) P9368; 49 A.F.T.R. (P-H) 322
FACTS: Petitioner taxpayers were in the gas furnace business in 1946, during which they sold 665 furnaces, each with a guarantee that they would turn the furnace on and off each year for five years. The taxpayers testified to keeping their books on the accrual method and claimed that the only way their income could be accurately reported was by charging against the cost of furnaces sold in 1946 the reserve representing the amount which they became legally liable to expend in subsequent years in connection with the sales. The Tax Court disallowed the deduction representing the reserve. The court reversed and held that petitioners' method of accounting came much closer to giving a correct picture of their income than would a system in which they sold equipment in one year and received an inflated price because they obligated themselves to refund part of it in services later, and that it did not offend any statutory requirement. The record supported petitioners' contention there was a legal liability when the purchase price was paid, that the cost of such service was established, and that the extra payment by the purchasers proved their intention to call upon petitioners for the service.
CONCLUSION: The court reversed the judgment, which disallowed petitioner taxpayers' deduction for a reserve account set up to cover the cost related to guarantees to service furnaces sold. The court held that petitioners' accrual method of accounting was closer to giving a correct picture of their income than a system in which they sold equipment in one year and received an inflated price because they were obligated to refund part of it in services later.
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Interested in learning how to get the top grades in your law school classes? Want to learn how to study smarter than your competition? Interested in transferring to a high ranked school?
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