Advance Payments/Income


AAA vs. United States, 367 U.S. 687 (1961)

Prepaid membership dues received by an auto club one year in advance were includible in income by an accrual basis taxpayer, since they are held under a claim of right without restriction on their disposition.

Automobile Club of Mich. vs. Comm. 353 US 180 (1957)

Membership dues received one year in advance by an automobile club were includible in income in the year received by an accrual basis taxpayer because the dues were held under a claim of right without restriction of their disposition.

Comm. vs. Indianapolis Power & Light Co. 110 S. Ct. 589 (1990)

The U.S. Supreme Court made a distinction between the taxation of refundable deposits. The Court confirmed advance payments are generally taxable and defined "advance payments" as a non-refundable payment. With a nonrefundable payment the payee is "guaranteed" it can keep the money as long as the payee performs its own obligation under the contract.

Michaelis Nursery Inc. 69 TCM (1995) (CCH) 2300, T.C. Memo 1995-143

Sole issue is whether amounts received by Nursery from its customers in connection with the sale of trees should have been recognized as income in the year the payments were received or in subsequent years, when the trees were delivered. Court held that the deposits received by the Corporation were advance payments of income constituting taxable income to the petitioner when received. The corporation enjoyed "complete dominion" over these payments because it had no obligation to repay any amount to the buyers unless the corporation defaulted on its commitment to deliver the trees.

Oak Industries vs. Comm. 96 TC 559 (1991)

Held that security deposits received by NST are not includible in petitioners' taxable income because NST did not enjoy "complete dominion" over the deposits when the deposits were made. Also see Buchner vs. Comm. 60 TCM 559 (1991).

Schlude vs. Comm. 372 US 128 (1993)

Prepaid lesson fees were includible in income by an accrual-basis dance studio in the year of receipt and not pro rata over the period during which the lessons were to be given. However, contract installments not becoming due and payable during the year (and not secured by note) were not taxable in that year if the lessons had not yet been given.