*263 Decision will be entered for the respondent.
Held, the revision effected by petitioner in 1945 to reflect its contract sales account in a manner it considered commensurate with services to be rendered under the contracts constituted a change in its method of accounting, for which the advance consent of respondent was required. Held, further, respondent's action in rejecting the change and his requirement that the method of accounting employed by petitioner prior to 1945 be continued, not proven to be arbitrary or an abuse of his discretion.
*1086 The respondent determined deficiencies in income and excess profits taxes of petitioner as follows:
| Year | Income tax | Excess profits tax |
| 1945 | $ 3,189.54 | $ 21,348.48 |
| 1946 | 10,423.44 |
The questions presented are: (1) Whether the method of accounting employed by petitioner subsequent to January 1, 1945, was such a change in accounting for its income as to require the advance consent of respondent, under Regulations 111, section 29.41-2; and whether *1087 the method of accounting employed by petitioner prior to January 1, 1945, more properly reflected its income than did that employed subsequent thereto.
FINDINGS OF FACT.
The stipulation of facts filed by the parties, with exhibits attached, is adopted and by this reference made a part hereof.
The petitioner is Advertisers Exchange, Inc., a New York corporation, with its principal office at New York City. The pertinent tax returns for the years involved were filed with the then collector of internal revenue for the third district of New York. Petitioner has at all times pertinent hereto kept its books on an accrual method of accounting and so reported its income on a calendar*265 year basis.
The petitioner was organized in 1929 to engage in the business of selling advertising copy and materials to its customers engaged in various types of businesses pursuant to contracts entered into therewith. The services first performed by petitioner consisted of creating ads and mats, the size of 8 to 10 square inches per ad, for reproducing the ads in newspapers and other advertising media. The petitioner produced between 400 and 500 of these ads and supplied each customer with a set of 52 of them, one for each week of the year, shipped all at one time, which shipments were termed drop shipments.
About 1936, the petitioner decided its ads were not adequate to meet the needs of its customers. It was decided that more elaborate and scientific advertising was necessary if it were to be successful in continuing the business. Petitioner enlarged its art department, employed more copywriters, layout people, and did a great deal of research among retail merchants engaged in the drug, food, and hardware businesses, its customers eventually being confined to these three classifications. It found that it not only had to furnish complete advertising made up just prior to the*266 period of publication, but conditions also required executive bulletins and digests of information available as to how the various customers could get the most out of their businesses, as well as sales training programs designed to increase the efficiency of retail sales clerks employed thereby. The bulletins and digests for the use of the druggists were sent out weekly. Those for the use of the other categories of customers were sent out monthly.
As the result of the research and study made by petitioner, it began preparing ads for monthly shipment to its customers and entered into contracts with them to furnish advertising services each month for which it billed the customer monthly after shipment was made. Petitioner also continued the so-called drop shipments. In 1939 the monthly shipment business began to increase over the drop shipments, *1088 and by 1943 the latter type of shipment ceased completely, being replaced by the monthly shipments.
The ads prepared the month preceding shipment were in much more elaborate detail and much larger than those previously shipped comprising drop shipments. These ads were composed by the petitioner's staff. Zinc plates were made*267 from the originals and mats were made from the plates. These mats, along with printed copy ranging in newspaper size from 1 to 4 columns, were furnished petitioner's customers and used by them for newspaper advertising under their contracts with petitioner. In addition to the foregoing, petitioner also maintained "libraries" containing some 5,000 different cuts pertaining to the drug, food, and hardware businesses from which prepared mats could be sent to its customers upon their request. Special ads for special occasions were made up as requested by the customers for their use in conducting 1-cent sales, dollar sales, anniversary sales, as well as trading-stamp programs. Customers were also assisted in plans for laying out stores and remodeling jobs. The contract price charged its customers was based on population of the city where the customer was located. The services performed, in addition to the monthly shipment of ads described herein, were all included in the monthly contract price, and every contract was exclusive in the community where the customer was located.
While operating under the drop shipment method, petitioner billed its customer at the time the material was*268 furnished and the income from the billing was accrued on its books in the full amount thereof as a sale at the time of the billing. Petitioner's contracts with its customers on the monthly shipment basis were for a period of 1 year and were for a stated annual amount payable monthly. Prior to January 1, 1945, it was the petitioner's accounting practice to consider as sales during the month in which the contract was signed the full amount of the contract price. The direct expense of furnishing the contract services was charged to expense when incurred. Salesmen's commissions were charged to expense during the month in which the contract was signed.
In 1944 petitioner entered into 1,281 contracts which resulted in contract sales in the net amount of $ 220,435.31, computed in accordance with the foregoing method of accounting, which amount was reported in petitioner's 1944 income tax return as total sales for that year. The amount thus reported included contracts which extended over in some cases to the year 1945, and in some cases to the year 1946. In 1945 the petitioner revised its sales account to reflect the sales in a manner which it considered to be commensurate with the *269 performance of services under the contracts. The sales income from the services under the contracts that extended beyond the calendar year was deferred *1089 to the year or years covered by the contracts. Petitioner did not apply for nor did it obtain the advance consent of respondent so to change its method of accounting from that it had employed since 1929.
Subsequent to January 1, 1945, the petitioner's revised method of accounting resulted in its income from services being billed monthly in the month which related to the material forwarded to the subscribers, and the income was accrued upon the corporate books as of that time. Under the revised method salesmen's commissions were deferred allocably to the sales and accrued monthly as expense under the contract year involved. In those contracts which extended from one taxable year to the next, direct costs incurred in the last month of one year were expensed in that year while income was accrued in the first month of the subsequent year when petitioner's customers were billed. Under petitioner's revised method of recording its sales, the amount reported as sales in 1944 would have been reported as follows:
| 1944 | $ 86,262.83 |
| 1945 | 131,804.28 |
| 1946 | 1 2,368.20 |
During 1945, the petitioner entered into 1,577 contracts which resulted in net contract sales of $ 294,046.37. This amount included contracts which extended over in some cases to the year 1946, and in some cases to the year 1947. Under petitioner's revised method of recording its sales the foregoing amount would have reported sales as follows:
| 1945 | $ 113,248.03 |
| 1946 | 175,367.53 |
| 1947 | 3,088.62 |
| $ 291,704.18 | |
| 1944 contract sales transferred to 1945, but deferred to 1946 | 2,342.19 |
| Total | $ 294,046.37 |
The petitioner reported in its 1945 tax return contract sales of $ 245,052.31 plus other income of $ 9,333.09, or a total of $ 254,385.40, the contract sales comprising the sum of the following amounts:
| 2 $ 131,804.28 | |
| 113,248.03 | |
| Total | $ 245,052.31 |
The amounts of $ 177,709.72, consisting of $ 175,367.53 and $ 2,342.19, and $ 3,088.62, or a total of $ 180,798.34, were deferred to the years 1946 and 1947, respectively. *271 The Commissioner adjusted the petitioner's 1945 return by eliminating from income the amount of $ 131,804.28 and adding to income the above amount of $ 180,798.34, *1090 leaving a net adjustment of $ 48,994.06, thereby giving no effect to the deferment of income.
During 1946, the petitioner entered into 1,967 contracts. The petitioner reported in its 1946 tax return contract sales of $ 331,772.76, 3 which was the sum of the following amounts:
| Contract sales written in 1946, and which petitioner considered | |
| applicable to 1946 | $ 154,063.00 |
| Contract sales written in 1944, which petitioner considered | |
| applicable to 1946 -- $ 2,368.20 less $ 26.01 adjustment made | |
| in 1945 for error in computing 1944 sales | 2,342.19 |
| Contract sales written in 1945, and which petitioner considered | |
| applicable to 1946 | 175,367.53 |
| Total contract sales | $ 331,772.72 |
| Income, other than contract sales | 6,902.03 |
| Gross sales, per tax return | $ 338,674.75 |
*272 The petitioner deferred contract sales of $ 220,257.09 comprising the following amounts for the years stated:
| From 1945 to 1947 | $ 3,088.62 |
| From 1946 to 1947 | 213,933.12 |
| From 1946 to 1948 | 3,235.35 |
| $ 220,257.09 |
The Commissioner adjusted the petitioner's 1946 return by adding to income the above amount of $ 220,257.09, and eliminating from income $ 180,798.34, leaving a net adjustment of $ 39,458.75, thereby giving no effect to the deferment of income.
The petitioner in its 1945 tax return deducted as salesmen's commissions the amount of $ 79,579.17. This amount included the amount of $ 32,951.07 which petitioner considered as an offsetting item against the income of $ 131,804.28 deferred from the year 1944. This total deduction did not include the amount of $ 45,199.58 which petitioner considered as an offsetting item to the income of $ 180,798.34 deferred to the subsequent years 1946 and 1947, and which was deferred to 1946 and 1947. The Commissioner adjusted the petitioner's 1945 income by eliminating the above deferred commissions of $ 32,951.07, and allowed the above deferred commissions of $ 45,199.58, resulting in a net adjustment of $ 12,248.51.
The petitioner*273 in its 1946 tax return deducted as salesmen's commissions the amount of $ 110,416.86. This amount included the amount of $ 45,199.58 which petitioner considered as an offsetting item against income of $ 177,709.72 deferred from 1944 and 1945. This total did not include the amount of $ 55,064.26 which petitioner considered as an offsetting item to the income of $ 220,257.09 deferred to the years 1947 and 1948, and which was deferred to 1947 and 1948. The Commissioner *1091 adjusted the petitioner's income for 1946 by eliminating the above deferred commissions of $ 45,199.58, and allowed the above deferred commissions of $ 55,064.26, resulting in a net adjustment of $ 9,864.68.
OPINION.
Basically, the dispute here involves the proper period in which to report and tax income derived by petitioner from sales under contracts with its customers. The applicable statutes involved are sections 41 and 42 of the Internal Revenue Code of 1939, pertinent portions of which are set forth below. 4
*274 Petitioner's business during the taxable years and for some time prior thereto consisted of supplying advertising copy and other related services pursuant to contracts with its customers, which contracts covered a period of 12 months and were for a stated annual amount payable monthly. Most of these contracts, particularly those of renewal, were signed and accepted sometime prior to the effective dates thereof and, occasionally, even in a preceding calendar year. More frequently than not, the 12-month period during which the services called for in the contracts were to be rendered covered portions of 2 calendar years. At all times pertinent hereto, petitioner employed an accrual system of accounting and for some years prior to 1945, petitioner, consistent with its application thereof, accrued the full amount of the contract price as sales during the month in which the particular contract was signed. Direct expenses of servicing the contract were accrued when incurred. Salesmen's commissions were accrued at the time the contract was signed. In 1945, petitioner recast its sales account to defer income from sales to the year or years covered by the contracts so as to reflect such*275 sales in a manner it considered commensurate with the servicing of the contracts. It also deferred the accrual of salesmen's commissions allocably over the period covered by the contracts.
Respondent's determination herein is predicated on his view that petitioner's revised method of accruing and reporting its income from sales subsequent to January 1, 1945, constituted a change in its method of accounting therefor that required his prior consent, which consent *1092 was not sought nor obtained, and that such method does not clearly reflect petitioner's income for the years involved, but, to the contrary, resulted in a distortion thereof. The adjustments made by the respondent in his determination are consistent with the method employed by petitioner prior to 1945 and, in effect, required a continued use thereof.
Petitioner does not deny its failure to obtain respondent's consent to effect the revision, but it maintains that it merely changed its method of selling, not its method of accounting, and that such consent was therefore unnecessary. Further, petitioner urges that it was in error when it did not use the revised method of recording its sales in 1943 and 1944, and that*276 it should not now be penalized for correcting that error after recasting its sales account to conform to its contractual method of selling and billing.
No particular system of accounting for taxable income is given statutory preference. Rather, a taxpayer has complete freedom of choice in adopting a system of accounting to suit his particular need so long as that adopted clearly reflects his income for a 12-month period. See secs. 41 and 42, supra, at footnote 4. In the instant case, petitioner has employed an accrual system of accounting since its organization in 1929. In the use of such a system the rule that an item, whether of income or expense, accrues for purposes of taxation when all events have occurred necessary to fix the liabilities of the parties involved and to determine the amount thereof, is too well established to require citation of authority. It is the right to receive income, not the actual receipt thereof, that determines when it should be accrued and included in gross income. United States v. Harmon, 205 F.2d 919">205 F. 2d 919. But, these seemingly simple and practical underlying principles are subject to varying interpretations*277 and divergent methods of application. See Frost Lumber Industries, Inc. v. Commissioner, 128 F. 2d 693, in which it is aptly stated that "* * * what to one practical mind seems heresy, to another equally practical, seems doctrine." Thus it is that there are apparently divergent interpretations and methods of application in accounting for income on an accrual basis, all of which have been recognized and accepted as proper so long as there was consistency.
Consistency is the key and is required regardless of the method or system of accounting used. Beacon Publishing Co., 21 T.C. 610">21 T. C. 610, revd. 218 F. 2d 697; Curtis R. Andrews, 23 T. C. 1026; E. W. Schuessler, 24 T. C. 247; United States v. Mitchell, 271 U.S. 9">271 U.S. 9; Cecil v. Commissioner, 100 F.2d 896">100 F. 2d 896. The change made, or revision, as petitioner chooses to call it, in the treatment accorded petitioner's contract sales and the accrual thereof, we think was clearly a change in its method of accounting. Regs. 111, sec. *278 29.41-2. And a change from one *1093 method of accounting to another is seldom possible without some distortion of income. Thus, respondent may, as here, reject any change in the accounting treatment of items of income made without his prior consent and approval of compensating adjustments to insure that distortions arising therefrom are not at the expense of the governmental revenue. Kahuku Plantation Co. v. Commissioner, 132 F.2d 671">132 F. 2d 671.
As heretofore noted, the effect of respondent's determination is to require the continued use of the accounting method consistently employed by petitioner for a number of years. To do so is within the broad administrative discretion accorded respondent under the statute and is not to be disturbed unless an abuse of such discretion is evident. Schram v. United States, 118 F. 2d 541. See Brown v. Helvering, 291 U.S. 193">291 U.S. 193, wherein the Court said at page 203 that it "* * * is not the province of the court to weigh and determine the relative merits of systems of accounting." No abuse of discretion has here been shown.
Nor may petitioner's action*279 in effecting the change in the manner of treating items of income and expense be denominated as merely a technical correction of prior errors, although its intention was to align more closely its income from contract sales with the expenses incurred in servicing the contracts. This was a substantial change which may have had some adverse effect upon the revenues, thus clearly requiring the Commissioner's prior consent to the change. Cf. Beacon Publishing Co., supra;Curtis R. Andrews, supra;E. W. Schuessler, supra; S. Rept. No. 1622, 83d Cong., 2 Sess., p. 301.
Respondent is sustained.
Decision will be entered for the respondent.
Footnotes
1. This amount was corrected in 1945 to $ 2,342.19 for error made in 1944 sales.↩
2. Deferred from 1944, as above noted.↩
3. The amounts are as stipulated. The obvious discrepancy is unexplained in the record.↩
4. SEC. 41. GENERAL RULE.
The net income shall be computed upon the basis of the taxpayer's annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income.
SEC. 42. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED.
(a) General Rule. -- The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41↩, any such amounts are to be properly accounted for as of a different period. * * *