RCA Corp. v. United States
United States Court of Appeals for the Second Circuit
664 F.2d 881 (1981)
Since 1946 RCA Corporation (plaintiff) had serviced and repaired products customers bought. Customers prepaid a lump sum for a service and repair contract that lasted from three months to two years from purchase. RCA used an accrual method to account for revenues earned from the service contracts. Each month RCA credited to current income the cost of selling and processing the contracts sold during that month, plus a profit, and deferred the rest of the revenues to a deferred-income account. As RCA performed services under the contracts, it journaled the estimated income from each month’s contracts from the deferred-income account to current income. RCA based its earned-income estimates on past experience in the business, accounting for seasonal repair patterns, average daily workloads, and workdays per month. The projections relied on some untested assumptions and were imperfect but matched service-contract revenues and expenses reasonably accurately. After an audit, the tax commissioner rejected RCA’s accrual accounting method for service-contract revenues as not clearly reflecting income as defined under the tax code, and the Internal Revenue Service (IRS) (defendant) required RCA to report those revenues when received instead of deferring a portion. RCA petitioned for a refund of nearly $6 million in taxes for 1958 and 1959. Only one witness—an accounting expert for RCA—testified. The district court ruled for RCA, reasoning that its accrual method matched service-contract revenues and expenses with reasonable precision and clearly reflected income. The IRS appealed.
Rule of Law
Holding and Reasoning (Kearse, J.)
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