Rev. Rul. 65-141

Advice has been requested regarding the proper time of inclusion in gross income of a taxpayer, using the accrual method of accounting of advance payments for room and board received under the circumstances set forth below.

X corporation, which uses the accrual method of accounting and reports its income on the basis of a fiscal year ending on July 31, owns and operates a dormitory providing students at Y university with room and board. X requires students to reserve accommodations in its dormitory several months in advance of the school year which commences in September. The contracts entered into by the students with X require them to make an advance payment on the reserved accommodations not later than July 15. The remaining instasllments are payable during the school year.

Pursuant to an escrow agreement, X delivers the contracts, which it enters into with the students prior to the commencement of the school year, to M bank, as escrow agent. Under the terms of the escrow agreement between X and M , the advance payments due from the students on or before July 15 are received directly by M from the students and held by it until September 5, the first date for occupancy of the dormitory under the contracts. On September 5, M delivers the contracts and the advance payments held by it pursuant to the escrow agreement to X .

The escrow agreement also provides that M may make refunds to students from the payments held by it prior to September 5, but only with the written approval of X or certification from the housing bureau of Y university that a refund is due under its regulations. Once the advance payments are released to X on September 5, it assumes all responsibility with respect to any pending refund claims.

Section 451 of the Internal Revenue Code of 1954 provides, in part, that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

Section 1.451-1(a) of the Income Tax Regulations provides, in part, that under an accrual method accounting, income is includible in gross income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. Consequently, where the accrual method is used, the right to receive and not the actual receipt determines the year of inclusion of the amount in gross income. See Spring City Foundry Co. v. Commissioner , 292 U.S. 182 (1934), Ct. D. 829. C.B. XIII-1, 281 (1934). An accrual method taxpayer would therefore include in its gross income contract installments of income in the year such installments become due and payable. Mark E. Schlude, et al. v. Commissioner , 372 U.S. 128 (1963), Ct. D. 1879, C.B. 1963-1, 99. Likewise, advance payments of income, received without restriction as to their use, are includible in gross income in the year of receipt, unless a different treatment is specifically provided in the Code or in the regulations thereunder. Rev. Rul. 60-85, C.B. 1960-1, 181.

Although the escrow arrangement in the instant case postpones actual receipt of the July 15 payments by X until September 5, under X's method of accounting it is the right to receive and not actual receipt that determines the inclusion of an amount in gross income. When the right to receive income becomes fixed, the income accrues, regardless of the time of actual receipt of the income. The escrow arrangement does not make X's right to the contract payments due on July 15 any less fixed since receipt of the payments by the M bank at the direction of X is the same as receipt by X .

Accordingly, it is held that the advance payments required under the contracts in the instant case are includible in X's gross income on July 15, the date such payments become due and payable under the terms of the contracts, or at the time such payments are actually received by X or M , whichever is earlier.