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For the taxable years in issue, ISOA, Inc., was an S
corporation that prepared its tax returns on the cash basis
method of accounting. On its 1995 return, ISOA, Inc., treated
$195,000 of licensing fees received during the taxable year as
“Unearned Income (Escrow)”. Petitioners claimed that ISOA, Inc.,
did not include the $195,000 of licensing fees it received in
taxable income due to the fact that the royalties the corporation
owed would not ultimately be paid until a final agreement was
reached with the University. Therefore, petitioners argued, the
full amount of the licensing fees which ISOA, Inc., would retain
could not be determined at the time of receipt.
Once again, respondent’s position on this issue calls into
play fundamental principles of Federal income taxation. As a
general rule, a cash basis taxpayer recognizes income in the year
of receipt. Sec. 451(a); sec. 1.451-1(a), Income Tax Regs.
Exceptions to this general rule exist for amounts properly
characterized as deposits or amounts held in trust that might
have to be returned. See, e.g., Commissioner v. Indianapolis
Power & Light Co., 493 U.S. 203, 207-208 (1990); Johnson v.
Commissioner, 108 T.C. 448, 467-475 (1997), affd. in part, revd.
in part and remanded on another ground 184 F.3d 786 (8th Cir.
1999). Unless received under a claim of right, “a taxpayer need
not treat as income moneys * * * which were not his to keep, and
which he was required to transmit to someone else as a mere
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