Rev. Rul. 74-372

Advice has been requested whether a taxpayer operating a stock brokerage business, using the accrual method of accounting, must report the commissions on the sale or purchase of securities for a customer on the trade date or the settlement date.

The taxpayer is a stock brokerage house, using the accrual method of accounting, engaged in the securities business as a member of the New York Stock Exchange. At the request of investors, the taxpayer enters into contracts to buy or sell securities. The date on which such a contract is entered into is termed the "trade date." At this time, an itemized statement of the transaction, containing the price of the securities, the quantity, and the commission due thereon, is sent to the taxpayer in confirmation of the trade. Then, pursuant to rules of the New York Stock Exchange requiring the settlement of customer accounts no later than five days after trade date, delivery of and payment for the securities is generally made on the fifth subsequent day, which is termed the "settlement date." During the interval between trade and settlement dates, the taxpayer performs the administrative steps necessary to record the transaction and to effectuate the physical exchange of the securities and payment on the settlement date.

The specific question is whether, under the circumstances described above, the trade date or the settlement date is the proper date for accruing the commission on the sale or purchase.

Section 451 of the Internal Revenue Code of 1954 provides 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 of the Income Tax Regulations provides, in pertinent part, that under the accrual method of accounting, income is includible in gross income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. See also section 1.446-1(c)(1)(ii).

On the trade date, all the events have occurred that fix the taxpayer's right to receive the commission. The event that fixes such right in this situation is the execution of the trade, which occurs on the trade date. All actions that remain to be performed by the taxpayer after this date are of a ministerial nature necessary to effectuate the mechanics of securities transfer and are merely in confirmation of the trade entered into on the trade date. Also, since the amount of commissions is determined on the basis of the securities sold or purchased on the trade date, the amount of income to be accrued can be determined with reasonable accuracy.

Accordingly, it is held that, in the instant case, the proper time for accruing the commission income on the sale or purchase of securities is the trade date.

Any change to the method of accruing commission income on the trade date is a change in method of accounting within the meaning of sections 446 and 481 of the Code and the regulations thereunder.