Reporting commissions.

For the first time, the Tax Court, in Charles Schwab v. Commissioner, said that an accrual method brokerage firm must accrue commission income on the trade date rather than on the settlement date.

The key issue was to identify the date a commission should be accrued. The IRS said the execution of an order on behalf of a customer was the essential service the taxpayer performed and, thus, was the right time to receive the commission. Although many actions were performed after the trade date, they were regarded as administrative and so did not preclude the commission from accruing. By branding these actions as administrative, they were relegated to the category of "conditions subsequent," meaning they were not important elements of the earning process. Although conditions subsequent may terminate an existing right to income, the commission can still be accrued.

Observation: Schwab made an interesting, albeit unsuccessful, argument. It said that, unlike a full-service broker, these administrative actions (following the trade date) should preclude trade date accrual because they represented such a substantial proportion of Schwab's overall activities. The court rejected this argument -- Schwabs unique method of conducting business did not change the condition-subsequent status of these post-trade date actions.