T.C. Memo. 1996-413
UNITED STATES TAX COURT
FRANK'S CASING CREW AND RENTAL TOOLS, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 25058-93, 1327-95. Filed September 16, 1996.
P is an "oil field contractor" that sells oil
pipes, leases equipment used in oil fields, and
provides crews necessary to operate the leased
equipment. P's contracts with its customers generally
provide that payment is due when P sends the customer
an invoice that includes all supporting documentation
(i.e., job tickets, equipment tickets, and third party
charges). On a number of occasions during the relevant
years, P did not invoice a customer until after yearend
because it had not yet received a third party's
invoice. In those cases, P did not accrue the related
income until the year during which it invoiced the
customer, even though its contract with the customer
was fully performed by the close of the previous year.
Held: It was not an abuse of discretion for respondent
to conclude that income from the yearend contracts was
accruable for the years in which performance of the
contracts was completed.
Stanley B. Blackstone, for petitioner.
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Susan S. Canavello, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Frank's Casing Crew and Rental Tools, Inc.,
petitioned the Court to redetermine respondent's determination of
income tax deficiencies of $182,660, $164,150, and $46,461 in its
taxable years ended August 31, 1989, 1990, and 1991,
respectively. Following concessions by respondent, we must
decide whether respondent committed an abuse of discretion in
changing petitioner's method of accounting for income from
certain of its contracts. We hold for respondent. Unless
otherwise stated, section references are to the Internal Revenue
Code in effect for the years in issue. Rule references are to
the Tax Court Rules of Practice and Procedure. Dollar amounts
are rounded to the nearest dollar.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations and attached exhibits are incorporated herein by
this reference. Petitioner was incorporated on October 8, 1956,
under the laws of the State of Louisiana. It filed 1988, 1989,
and 1990 Forms 1120, U.S. Corporation Income Tax Return, using an
accrual method and a fiscal year ended August 31.1 It had its
1
Petitioner subsequently amended its 1988 and 1989 tax
returns.
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principal office in Lafayette Parish, Louisiana, when it
petitioned the Court.
Petitioner is an "oil field contractor" that sells oil
pipes, leases equipment used in oil fields, and provides crews
necessary to operate the leased equipment. Petitioner's
customers are mainly large oil companies, and many of these
customers transport the leased equipment from petitioner's
location to the job site. In some cases, petitioner transports
the leased equipment itself, or it rents equipment from third
parties in order to transport the leased equipment to the job
site. Petitioner incurs expenses transporting the leased
equipment to the sites.
Petitioner enters into written contracts with its customers.
These contracts are usually provided by the customers, and the
terms of each contract vary from customer to customer. A term
that tends to be uniform throughout the contracts is that a
customer's payment is due when petitioner sends the customer an
invoice that includes all supporting documentation (e.g., job
tickets, equipment tickets, and third party charges). On a
number of occasions during the relevant years, petitioner did not
invoice a customer until after the year of completion of its
performance of the contract because it had not yet received a
third party's invoice. In those cases, petitioner postponed
accrual of the related income until the year of invoice. In the
case of pipe sales that occurred before yearend, but were not
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invoiced until after yearend because of lack of documentation,
petitioner followed a similar pattern. Petitioner's use of the
invoicing date to control the accrual of income resulted in a
deferral of the following amounts of gross receipts for sales and
services that were completed during its taxable years ending in
1988, 1989, and 1990 but billed in the respective succeeding
taxable years:
Taxable year ended Amount
Aug. 31, 1988 $846,897
Aug. 31, 1989 553,623
Aug. 31, 1990 927,451
Petitioner accrues various expenses at yearend.
OPINION
Respondent determined that petitioner's method of accounting
erroneously deferred recognizing income from sales and services
billed after the year in which they were completed. Respondent
argues that this method was inconsistent with the all events test
for the accrual of income. Respondent argues that petitioner
acquired a fixed right to receive income for these goods and
services once it completed performance. Petitioner argues that
its right to receive income from these yearend sales and services
was not fixed in the year that the goods were delivered or the
services rendered, given that it could not invoice its customers
until the following year. Petitioner argues that respondent
abused her discretion in not accepting its method of accounting,
which in petitioner's view results in only "minor deviations"
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from a strict application of an accrual method. Petitioner
argues that respondent cannot challenge its method of accounting
for yearend sales and services because it has used this method
consistently in prior years that were audited by respondent
without relevant change.
Turning first to the parties' dispute over the all events
test, a taxpayer recognizes income under an accrual method when
all events have occurred that fix the right to receive the
income, and the amount thereof can be determined with reasonable
accuracy. Secs. 1.446-1(c)(1)(ii), 1.451-1(a), Income Tax Regs.;
see also United States v. Anderson, 269 U.S. 422 (1926);
Hallmark Cards, Inc. v. Commissioner, 90 T.C. 26, 32 (1988).
It is the right to receive an item of income, rather than its
actual receipt, that controls when the item is includable in the
gross income of an accrual method taxpayer. When the right to
receive a set amount of income becomes fixed, the income
ordinarily accrues. Spring City Foundry Co. v. Commissioner,
292 U.S. 182, 184 (1934); Resale Mobile Homes, Inc. v.
Commissioner, 91 T.C. 1085, 1093 (1988), affd. 965 F.2d 818 (10th
Cir. 1992).
Petitioner claims that its right to receive income on a
yearend sale or service is not fixed for purposes of the all
events test until it sends the fully documented invoice to its
customer. It was not an abuse of discretion for respondent to
reach the opposite conclusion. By the end of each year in issue,
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petitioner had completed its performance with respect to the
sales and services. The parties do not dispute the amount of
income earned by petitioner for these goods and services. We
conclude that respondent committed no abuse of discretion in
determining that the all events test had been met. Petitioner
must accrue income from the goods and services in the taxable
year in which performance occurs, and it cannot wait until the
year in which it invoices its customer. Although petitioner may
not have physically possessed all of the documentation necessary
to invoice its customers for the sales and services in the year
of performance, petitioner's preparation and sending of the
invoices were ministerial acts that did not postpone accrual of
the income otherwise earned. See Continental Tie & Lumber Co. v.
United States, 286 U.S. 290 (1932); Dally v. Commissioner, 227
F.2d 724 (9th Cir. 1955), affg. 20 T.C. 894 (1953); Frost Lumber
Indus. v. Commissioner, 128 F.2d 693 (5th Cir. 1942), revg. 44
B.T.A. 1249 (1941); Orange & Rockland Utils., Inc. v.
Commissioner, 86 T.C. 199, 214 (1986). For purposes of the
all-events test, completion of petitioner's performance on the
contracts fixed its right to receive payment for the goods and
services, regardless of petitioner's invoicing practice.2
2
While we have previously upheld deferred billing practices
of certain taxpayers, those taxpayers generally operated in a
heavily regulated industry or were able to establish wide
acceptance within their industry of such an accounting practice.
See, e.g., Orange & Rockland Utils., Inc. v. Commissioner,
86 T.C. 199 (1986); Public Serv. Co. of New Hampshire v.
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Petitioner relies primarily on Decision, Inc. v.
Commissioner, 47 T.C. 58 (1966), for a contrary result.3 We find
petitioner's reliance misplaced. In Decision, Inc. v.
Commissioner, supra, the taxpayer's contracts provided that
orders placed in 1963 would be billed on January 1, 1964. The
Court held that the arrival of the 1964 billing date was
necessary to fix the right to income, and that therefore the
income did not accrue during 1963. In contrast with the present
case, performance of the taxpayer's contracts in that case was
not completed until February of 1964, after the billing date. We
conclude that Decision, Inc. is distinguishable on that basis.
Petitioner also argues that respondent is barred from
arguing that its method of accounting for the sales and services
is inappropriate, given the fact that she did not challenge this
method during prior audits. We disagree. Respondent's
acquiescence in an accounting practice in prior years does not
prevent an adjustment in later years. Meneguzzo v. Commissioner,
43 T.C. 824, 836 (1965); Massaglia v. Commissioner, 33 T.C. 379,
386-387 (1959), affd. 286 F.2d 258 (10th Cir. 1961). Although
Commissioner, 78 T.C. 445 (1982); Hospital Corp. of America &
Subs. v. Commissioner, T.C. Memo. 1996-105. In the instant case,
petitioner has presented no evidence to establish that its
invoicing practice is regulated or widely accepted in the oil
field industry.
3
Petitioner also relies on Jerry Lipps, Inc. v.
Commissioner, T.C. Memo. 1990-293. We do not read that case to
compel a result different than we reach herein.
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respondent's acquiescence in prior audits to a taxpayer's
accounting method may be considered in determining whether she is
justified in changing that method currently, Public Serv. Co. v.
Commissioner, 78 T.C. 445, 456 (1982), we reject petitioner's
attempt to prevent respondent from changing its erroneous method
of accounting under the facts herein. See Ezo Prods. Co. v.
Commissioner, 37 T.C. 385, 391 (1961); see also Thomas v.
Commissioner, 92 T.C. 206, 225-226 (1989). We hold for
respondent. In so holding, we have considered all of
petitioner's arguments for a contrary holding and, to the extent
not addressed above, find them to be irrelevant or without
merit.4
To reflect concessions,
Decisions will be entered
under Rule 155.
4
In particular, we note that we have rejected petitioner's
argument concerning an abuse of discretion. Simply stated,
respondent's determination is within the broad discretion that
she is afforded with respect to matters of tax accounting. See,
e.g., Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532-533
(1979); Commissioner v. Joseph E. Seagram & Sons, Inc., 394 F.2d
738, 743 (2d Cir. 1968), revg. 46 T.C. 698 (1966); Thomas v.
Commissioner, 92 T.C. 206, 220 (1989).