Deferral of advance season ticket revenue.

In Tampa Bay Devil Rays, Ltd., TC Memo 2002-248, the tax-accrual method for deferred revenue from advance season tickets and private suite reservations.

During 1995 and 1996, the limited partnership received advance funds for 25% of the stated season ticket price, and deposits on reservations for private suites, in anticipation of major league baseball games scheduled for 1998.

The ticket application forms indicated that deposits were nonrefundable, unless the partnership could not fulfill its obligation because it did not receive final approval of the franchise. However, during 1995, the partnership adopted and followed a policy to refund customers on request.

The partnership used the accrual method for financial statement and tax purposes. For both book and tax purposes, it recorded the advance season ticket revenue and private suite reservations as deferred revenue--a liability. Further, during 1995 and 1996 (for book and tax purposes), the partnership did not deduct expenses directly related to the marketing and sale of the advance tickets and reservations; it reported these amounts as prepaid expenses--an asset. The taxpayer also operated a minor-league baseball affiliate of the Devil Rays during 1995 and 1996. It treated all the affiliate's marketing and sales expenses as current deductions.

When the Tampa Bay Devil Rays began to play in 1998, the partnership recorded the revenues and deducted the expenses previously deferred for book and tax purposes.

Generally under the accrual method, deposits for future services are recorded as income in the year received, not in the year the services are performed. In Auto. Club of Mich., 353 US 180 (1957) and AAA, 367 US 687 (1961), the Supreme Court held that prepaid membership dues had to be recorded as income in the year received, rather than ratably over the 12-month period covered by membership agreements that extended beyond the tax year the dues were received. According to the Court, allocating the amounts to two different periods was "artificial" because no specified or specific services were to be rendered.

In Schlude, 372 US 128 (1963), the Supreme Court relied on Auto. Club and AAA, despite the fact that advanced payments were for dance lessons, a specified service. It noted that the lessons were not to be provided at any specified time.

The Tax Court agreed that the facts fit within the narrow fact pattern of Artnell Co., .400 F2d 981 (7th Cir. 1968), acq., 1968-2 CB 1, rev'g and rem'g 48 TC 411 (1967), on remand, TC Memo 1970-85, which concluded that Chicago White Sox, Inc. could defer funds received on advance ticket sales until the year the games were played, because this method more clearly matched income with expenses.

Although the ruling was a home run for the Devil Rays, it highlights the narrow exception for deferral of advance revenue for specific services to be provided at a specified future time.

FROM KRISTINA DRZAL HOUGHTON, CPA, MST, MEYERS BROTHERS, P.C., LONGMEADOW, MA