1. Date: March 16, 2016
Preparer: James Phillips
Reviewer: Massood Yahya-Zadeh, T.K.M. Corporation
Subject: Tax Treatment of Advance Sales of Concert Tickets
Key Facts: This year, $20,000,000 of tickets had been pre-sold for concerts scheduled for
next year as well as the following year. For tax purposes, it would be preferred if
income could be deferred to the year of individual concert dates, rather than all in
this year. T.K.M. plans to recognize income for financial statement purposes at
the time of the concert. This is the first year that pre-sale of tickets has occurred,
and so the proper process of income recognition is not yet known.
Issue: Can T.K.M. legally defer income recognition of pre-sold tickets to the year(s) of
respective concerts?
Authorities: 1. IRC Section 451(a)
2. IRC Sections 446(a), (b), and (c)
3. Rev. Proc. 2004-34
4. Artnell Co. v. Comm (1968)
5. Tampa Bay Devil Rays, Ltd., et al. v. Comm. (2002)
6. Schlude v. Comm. (1963)
7. American Automobile Association v. U.S. (1961)
Conclusion: For financial statement purposes, T.K.M. plans on deferring income recognition
to the year of respective concerts, which is a valid means of recognizing income
under an accrual method of accounting. Additionally, many authorities have, in
the past, allowed for deferral of income for more than one year for tax purposes
under specific circumstances. Deferring income one and two years for specific
concert dates should be tolerable.
Analysis: Some authorities have denied allowing deferral of income to future years for tax
purposes. In Schlude v. Comm. (1963), for example, it was decided by a Supreme
Court 5-4 vote that Schlude should include all prepayments on dance lessons as
income in the year that cash was received; this may have been in part due to the
fact that there were contracts being arranged based on number of hours of lessons
and not a fixed date, which would be nearly impossible to plan for all fixed time
slots for the respective person, making it unlikely to know ahead of time for sure
when income can be guaranteed to be recognized. In American Automobile
Association v. U.S. (1961), again in a 5-4 vote, the Supreme Court decided that
the taxpayer could not defer income; in this instance, even though timing can be
known (the customer would pay for a certain number of months of coverage),
expenses cannot be reasonably predicted.
There are, however, many authorities that give evidence to why and when income
can be deferred to future periods. Tampa Bay Devil Rays, Ltd. v. Comm. (2002)
was decided by the Tax Court in favor of allowing deferral of income; as opposed
to the Schlude case, the argument for Tampa Bay Devil Rays was that the games
that would generate the income earned from the sale of tickets had a known, fixed
date sometimes years in advance, unlike with Schlude’s dance lessons which
allowed for a certain number of hours of lessons whenever the customer wants
them. In the Artnell Co. v. Comm. (1968) case, the 7th Circuit Court of Appeals
decided that, as with the Tampa Bay case, the services provided are reasonably

2. predictable, and so income may be deferred to more accurately reflect when
earned; there are times when deferral may allow the company to match income
much more effectively than if the IRS demands all income received to be taxable
when received. In the end, the question seems to come down to timing and extent
of income earned, and how predictable those factors are.
In addition to cases arguing for deferral in the event of knowing when and how
much income will be earned, there are also several general accounting rules and
revenue procedures which back this thinking. IRC Sec 451(a) states that the
taxpayer may use whatever accounting method the taxpayer uses for taxable
income to defer income if it is properly accounted for in a later period; IRC Sec
446(a) similarly states that taxable income is computed based on the method that
the taxpayer uses in keeping his or her books, with exceptions by IRC Sec 446(b)
mandating that the accounting method must reflect income earned. IRC Sec
446(c) lists permissible methods to compute taxable income, including accrual
method, affirming further previous statements of the validity of deferring income.
Revenue Procedure 2004-34 allows for a one-period deferral for prepayments to
the extent that the payments are not recognized in the current taxable year; more
restrictive than other examples, but still one more example of allowance for
deferral of income to more accurately match when actually earned.
The arguments against deferral of income are, indeed, valid, but they are each
regarding specific cases, as are the cases arguing for deferral, and as is the case
for T.K.M. With the cases for deferral, there is some mention as to the timing of
when income will be earned and the extent to which the prepayment of income
will be earned at that time. T.K.M.’s ticket sales are presumably for specific
concerts, or else it would be unlikely that customers would purchase them (who
would buy tickets for a concert that has not been planned to exist yet?); specific
concerts likely have a date set, or else, again, customers would not likely make
the purchase; it is reasonable to assume, then, that T.K.M. has met the “time”
factor mentioned. As to the “extent” factor, once a specific concert has occurred,
all prepaid revenues allocated to that concert can be reasonably earned; either the
customer who bought the ticket went to the concert, thus affirming that T.K.M.
has done its part in earning income, or the customer did not go to the concert and
thus waives his or her right to the event; in any case, after the date of a concert,
T.K.M. can reasonably say that the extent to which income has been earned is
known: the number of prepaid tickets for that show multiplied by the respective
ticket price. Thus, substantial authority supports T.K.M. deferring income in this
instance to the period in which the concert takes place.