Rev. Rul. 60-85

The Internal Revenue Service will not follow the adverse decision of the United States Court of Appeals for the Second Circuit in Bressner Radio, Inc. v. Commissioner , 267 Fed.(2d) 520, in cases involving prepaid income.

The point at issue in this case was whether income received in connection with television service contracts covering a twelve-month period should be reported as income in the year of receipt or whether such income should be deferred over the period of the contract.

Although the service contracts did not require the performance of specified services at particular times, the taxpayer allocated 25 percent of the service contract price to installation and deferred the balance over the twelve-month period of the contract. The Commissioner of Internal Revenue included all revenues from the service contracts in gross income in the year of receipt, instead of approving the taxpayer's allocation. The Tax Court of the United States relying on the Supreme Court's decision in Automobile Club of Michigan v. Commissioner , 353 U.S. 180, Ct. D. 1807, C.B. 1957-1, 513 sustained the Commissioner. In reversing Tax Court, the United States Court of Appeals distinguished the Automobile Club of Michigan case and held that the portion of the contract price allocable to months falling in the taxable year following that of receipt of the contract price was unearned in the taxable year and was properly deferred.

The Bressner Radio, Inc. , decision conflicts in principle with a long line of judicial authority holding that where a taxpayer receives prepaid income under a claim of right and without restriction as to its disposition, it must report the entire amount received each years as income. Subsequent to the Bressner Radio, Inc. , decision by the United States Court of Appeals, deferral of prepaid income until earned was again considered by the Tax Court in the case of Automobile Club of New York, Inc. v. Commissioner , 32 T.C. 906. There the Tax Court followed the Automobile Club of Michigan decision and held that the Commissioner properly required the petitioner to report as income all fees received during the taxable year.

Accordingly, the Service will continue its general policy of taxing prepaid income in the year of receipt. this policy applies to income from contracts to furnish services and to other types of prepaid income, such as prepaid royalties, rent, bonuses, etc., regardless of whether the period of proration is definite or indefinite, unless a different treatment is specifically provided in the Internal Revenue Code of 1939 or 1954 or the regulations thereunder.

¹ Released as Technical Information Release 205, dated January 19, 1960.