Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-96

1975-1 C.B. 139

Sec. 446

IRS Headnote

Accounting method; income-reporting change; expenses. An accrual-method taxpayer that made an approved change in reporting income from C.O.D. sales, representing 90 percent of its total sales, from the year of shipment to the year in which payment is received has not changed to a cash method of accounting and must continue deducting its expenses under the accrual method of accounting.

Full Text

Rev. Rul. 75-96

Advice has been requested whether a taxpayer may continue to deduct expenses on the accrual method of accounting under the circumstances described below.

The taxpayer, a corporation that develops and sells self-improvement courses, uses the accrual method of accounting to report its income. Ninety percent of the courses are sold to franchised distributors. These sales are made on a cash on delivery (C.O.D.) basis. Most of the taxpayer's accounts receivable consist of C.O.D. orders in transit. The remaining portion of the taxpayer's sales are made on an open account. All sales other that C.O.D. sales are reported when made. In the past, the taxpayer has always accrued expenses and taken into account inventories of its course materials in computing the taxable income for the year.

In July 1973 the taxpayer received permission to change, and did change, its accounting method for reporting C.O.D. sales in income, from reporting C.O.D. sales in the year in which shipment is made to reporting such sales in the year in which payment is received.

The specific issue is whether the taxpayer's change in the accounting treatment of C.O.D. sales is a change to the cash receipts and disbursements method of accounting that requires the taxpayer to deduct its expenses using the cash receipts and disbursements method.

Section 1.446-1(c)(1) of the Income Tax Regulations provides, in part, that under an accrual method, income is to be included for the taxable year when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. Under such a method, deductions are allowable for the taxable year in which all events have occurred which establish the fact of the liability giving rise to such deduction and the amount thereof can be determined with reasonable accuracy. The method used by the taxpayer in determining when income is to be accounted for will be acceptable if it accords with generally accepted accounting principles, is consistently used by the taxpayer from year to year, and is consistent with the regulations. For example, a taxpayer engaged in a manufacturing business may account for sales of his product when the goods are shipped, when the product is delivered or accepted, or when title to the goods passes to the customer, whether or not billed, depending upon the method regularly employed in keeping his books.

In Rev. Rul. 70-68, 1970-1 C.B. 122, the taxpayer, a corporation that engaged in the retail mail order business, made parcel post shipments C.O.D. That Revenue Ruling holds, in part, that since title to the C.O.D. goods does not pass until payment is made, a sale has not been made and the taxpayer must include in its closing inventory merchandise that has not been paid for at the close of the taxable year.

The change of accounting method granted in 1973 related to the accounting treatment of only one item, C.O.D. sales. C.O.D. sales are dependent upon delivery, acceptance, and payment for the goods shipped. If the C.O.D. goods are not accepted by the intended purchaser, they are returned to the seller and the intended purchaser is not liable for payment. Since the intended purchaser has the right to accept or reject the C.O.D. goods, all the events have not occurred at the time the C.O.D. goods are shipped to fix the taxpayer's right to receive income from such sales.

Accordingly, in the instant case, it is held that the change in accounting treatment of C.O.D. sales, from reporting C.O.D. income at the date of shipment to reporting C.O.D. income at the date of payment, did not change the taxpayer to the cash receipts and disbursements method of accounting. Further, it is held that the taxpayer must continue to deduct expenses using the accrual method of accounting.