Schuessler v. Commissioner

Brief Fact Summary. Taxpayer owned and ran a gas furnace business. With each furnace sold he provided a service guarantee to turn the furnace on and off for five years. For the 1946 tax year, he sold 665 and attempted to deduct a reserve account set up for the service guarantees.

Synopsis of Rule of Law. A reserve account may be set up and deducted from gross income when it is for a legal liability in existence.

Facts. Taxpayer was in the gas furnace business and he sold 665 in 1946. With each furnace he would turn it on and off for five years as part of the guarantee with the sale. Such service would normally cost $2.00 per call. He sold the furnaces for $20 to $25 more than his competitors because of the guarantee. Taxpayer deducted $13,300 representing a reserve set up to represent their estimated costs of carrying out the guarantee. The Tax Court did not allow the deduction.

Issue. May the Taxpayer deduct the amount set up in the reserve account?

Held. Circuit Judge Tuttle issued the opinion for the United States Fifth Circuit Court of Appeals in reversing the Tax Court and holding that Taxpayer was authorized to set up a reserve account out of the 1946 income.

Discussion. The Court of Appeals found that there was ample evidence to show that there was a legal liability created in 1946. Taxpayer had the obligation to render the service guarantee for each furnace sold for five years.