American Automobile Ass'n v.

United States
American American Automobile Association v. United
Automobile States
Association v.
United States,
367 U.S. 687
(1961), was an
income tax Supreme Court of the United States
case before the
United States Argued April 17, 1961
Supreme Court. Decided June 19, 1961
[1] Full case American Automobile Association
name v. United States
Contents 367 U.S. 687 (more)

1 Background 81 S. Ct. 1727; 6 L. Ed. 2d 1109;

1961 U.S. LEXIS 2105; 61-2 U.S.
1.1 Facts Citations
Tax Cas. (CCH) P9517; 7
1.2 Tax return
A.F.T.R.2d (RIA) 1618; 7 A.F.T.R.2d
1.3 Court of (RIA) 16118; 1961-2 C.B. 245
claims
1.4 Certiorari Case history

2 Opinion of the Prior Cert. to the Court of Claims

Court Holding
2.1 Dissents The Commissioner of Internal Revenue did not
3 See also abuse his discretion in determining that the
4 References prepaid dues were taxable as income in the
year in which they were actually received and
5 External links
in rejecting the taxpayer's method of
accounting.
Court membership

Chief Justice
Earl Warren
Associate Justices
Hugo Black · Felix Frankfurter
William O. Douglas · Tom C. Clark
John M. Harlan II · William J. Brennan Jr.
Charles E. Whittaker · Potter Stewart

Case opinions
Clark, joined by Warren, Black,
Majority
Frankfurter, Brennan
Stewart, joined by Douglas,
Dissent
Harlan, Whittaker
Laws applied
Internal Revenue Code § 41, § 455

Background
Facts

For the taxable years 1952 and 1953, the American

Automobile Association, an accrual-basis taxpayer, followed
a method of accounting whereby annual membership dues
collected in any month were treated as income 1/24 for the
month received, 1/12 for each of the next 11 months, and
1/24 for the following month, a method which was in accord
with generally accepted commercial accounting principles
and which was consistent with the Association's over-all
cost experience.

Tax return

The Commissioner of Internal Revenue determined not to

accept the taxpayer's accounting system, and adjustments
were made so as to reflect as gross income for each year the
entire amount of membership dues actually received during
the year. The Association paid the tax deficiencies resulting
from the adjustments, and, after a timely claim for refund
was denied, instituted suit to recover in the Court of Claims.

Court of claims

The court of claims sustained the Commissioner, finding that

the national automobile club had failed to apply members'
prepaid dues as taxable income in the calendar year of their
actual receipt.

Certiorari

Petitioner claimed its accrual method of accounting was not

artificial. The court granted certiorari to decide in what year
its prepaid membership dues were taxable income.

Opinion of the Court

The Supreme Court affirmed by Clark in a 5-4 decision.

It was held that the Commissioner of Internal Revenue did

not abuse his discretion in determining that the prepaid dues
were taxable as income in the year in which they were
actually received and in rejecting the taxpayer's method of
accounting.

It found that the accounting method employed by petitioner

was in accord with generally accepted commercial
accounting principles and practices, but could be rejected
by the Commissioner of Internal Revenue in the exercise of
his discretion under 26 U.S.C. § 41.[2] In particular,
petitioner's practice of accounting for expected future
service expenses in advance could have been found purely
artificial by the Commissioner. Furthermore, Congress had
specifically authorized petitioner's desired method of
accounting only in the instance of prepaid subscription
income and had refused to enlarge 26 U.S.C. § 455[3] to
include prepaid membership dues.

Thus, the exercise of the taxing authority in rejecting

petitioner's accounting system was not unsound, in light of
the discretion granted to the taxing authority by Congress.
Moreover, Congress had refused to enlarge the use of
petitioner's method of accounting beyond the area of
prepaid subscription income in the field of publishing.

Dissents

Stewart dissented on the ground that the taxpayer was

entitled to follow the accounting method adopted by it upon
proof that its average costs of service in future periods
reasonably matched dues allocated to such periods.

See also
Schlude v. Commissioner
Artnell Company v. Commissioner

References
1. American Automobile Association v. United States, 367
U.S. 687 (1961).
2. 26 U.S.C. § 41
3. 26 U.S.C. § 455

External links
Text of American Automobile Association v. United
States, 367 U.S. 687 (1961) is available from:
CourtListener Findlaw Google Scholar Justia Library
of Congress Oyez (oral argument audio)