Schlude v. Commissioner

The Schludes (plaintiffs) operated a dancing studio under a franchise from a parent company. The Schludes allowed the studio’s students to pay either full tuition on enrollment or tuition in installments that would only become due when the student completed a dance lesson. This meant that a student’s tuition often went unpaid for a year or more after the student signed the contract. Whenever a contract was signed, the Schludes paid the parent company a percentage of the student’s tuition as a franchise fee. The Schludes deducted those fees from their taxable gross income for the year. However, the Schludes used the accrual method of accounting and did not include unpaid tuition installments in their gross income until the payments became due. The commissioner of internal revenue (commissioner) (defendant) determined that the unpaid tuition installments were taxable gross income in the year the student signed the contract. The Schludes petitioned the tax court for a redetermination. The tax court ruled for the commissioner, and the United States Court of Appeals for the Eighth Circuit affirmed. The United States Supreme Court granted certiorari and vacated the court of appeals’ judgment. The Court remanded the case to the court of appeals for reconsideration in light of American Automobile Association v. United States, 367 U.S. 687 (1961). The court of appeals affirmed for the commissioner. The Court granted certiorari again.