The Supreme Court holds that it was proper for the Commissioner to include in income advance payments by way of cash, negotiable notes, and contract installments falling due but remaining unpaid during that year.

The Court rejected the taxpayer’s system as artificial since the advance payments related to services which were to be performed only upon customers’ demands and not on fixed dates in the future.

The Court likened this case to American Automobile Association because the contracts did not provide for lessons on fixed dates after the taxable year.

The dissent believes that the majority decision is in direct contrast to the most elementary principle of accrual accounting—that advances be considered reportable income only in the year in which they are earned by the taxpayer’s rendition of the services for which the payments were made.

Text of Schlude v. Commissioner, 372 U.S. 128 (1963) is available from: Cornell CourtListener Findlaw Justia Library of Congress Oyez (oral argument audio)