shall have been delivered by you to us within 18 (eighteen) month period mentioned in Paragraph 2 of this Article and unless such action or proceeding is commenced within 6 (six) months after the delivery of such written objection by you to us.

The agreement also provided:

Nothing in this Agreement contained shall be construed, deemed or interpreted to mean that any moneys due or payable to you hereunder are held in trust by us for you, it being the express intention hereof that such is not the case and that we shall have the right to commingle any part or portion of the sums payable to you out of or on account of the gross proceeds which may be received by us with any of our own moneys and to make use thereof without restriction, being indebted to you only for the amounts to which you are entitled hereunder at the time when sums shall be expressly payable to you hereunder.

In the event of breach of any obligation under the agreement constituting a default on Columbia's part, Raybert was entitled to institute an appropriate action for relief. The agreement further recited:

In no event, however, shall the rights herein acquired by us [Columbia] be subject to revocation or termination notwithstanding any such failure, breach or default of any kind on our part.

3. "The Monkees"

On or about April 16, 1965, Raybert entered into an agreement with Screen Gems, Inc. (hereinafter Screen Gems), a controlled subsidiary of Columbia, relative to the production and distribution of a certain television program, which was later known as "The Monkees." The provisions with respect to the distribution relationship of the parties and the sharing of the profits of "The Monkees" are similar to the "Easy Rider" agreement in all relevant respects, with the exception that "The Monkees" agreement provided for annual accounting statement periods ending July 31.

4. Raybert's Dissolution and Distributions

On May 23, 1970, Raybert's stockholders elected to dissolve the corporation. Accordingly, in pursuance of the plan of liquidation and dissolution, Raybert distributed all of its interest in "The Monkees" and "Easy Rider" to its shareholders.

On June 19, 1970, Columbia issued statement No. 9 with respect to "Easy Rider" for the 1-month period ended April 25,

1970, and accompanied such statement with a check in the amount of $164,040.48 payable to Berton Schneider and Robert Rafelson. The statement and check were received on June 22, 1970.

On August 7, 1970, Columbia issued its statement No. 10 with respect to "Easy Rider" for the 1-month period ended May 30, 1070, and accompanied such statement with a check in the amount of $854,248.32 payable to Berton Schneider and Robert Rafelson. Such statement and check were received on August 10, 1970.

On November 30, 1970, Screen Gems, having previously been informed that all of Raybert's rights in "The Monkees" had been distributed to its shareholders, transmitted its statement relative to "The Monkees" for the year ended July 23, 1970, together with a check in the amount of $199,888.08 payable to Berton Schneider and Robert Rafelson. Such statement and check were received on December 4, 1970.

Being advised that Raybert's shareholders would be required to include in their individual income tax returns the fair market value of the assets received by them on the liquidation of the corporation, petitioners' accountant met with various officials of Columbia and Screen Gems, prior to the time Raybert was liquidated, for the purpose of obtaining their best estimates of future earnings. At this meeting no one gave overall estimates of the value of the assets-some restricted themselves to domestic receipts, others to foreign receipts, etc. Columbia often used such estimates for business-planning purposes and for specific distribution plans.

From the information thus obtained, the accountant arrived at ultimate reportable values. These values were utilized in computing the amount realized in the liquidation distributions of Raybert.

There is no explanation in the record why this statement covered a period ended Apr. 25, 1970, rather than Apr. 30, 1970. The next statement covered the period ended May 30, 1970.

Statements Nos. 9 and 10 reported receipts and expenditures from foreign as well as domestic territories. The agreement allowed Columbia 120 days to compute the results from operations in foreign territories. However, the statements do not clearly show whether the figures with respect to foreign territories were derived from the same monthly period as those relating to domestic receipts or from an earlier period as allowed under the agreement. Respondent did not raise this issue and it is inferred therefore that the figures relating to all territories were derived from operations during the same monthly periods.

The estimates of total future earnings compiled by the accountant relating to "Easy Rider" totaled $24,850,000. Although the accuracy of the estimates of earnings from separate sources varied greatly, total receipts as of September 30, 1974, equaled $24,931,477. The estimate compiled by the accountant for receipts from all sources for "The Monkees" was $546,163. The actual receipts as of July 28, 1973, were $578,398. Petitioners recovered their basis in "Easy Rider" sometime prior to January 26, 1974, and in "The Monkees" prior to July 28, 1973.

Raybert filed its final corporate income tax return for the year ending June 30, 1970. Pursuant to section 446(b), respondent determined a deficiency in Raybert's income taxes by including all of "Easy Rider" payment No. 9, portions of "Easy Rider" payment No. 10, and "The Monkees" annual payment in Raybert's income for its final taxable year. Respondent apportioned the latter two payments by use of a fraction, the denominator of which was the length of the accounting period in days and the numerator of which was the length of time in the accounting period, also expressed in days, during which Raybert owned the contract. Respondent also determined deficiencies in petitioners' individual income taxes for 1970 by using the "income forecast" method of amortizing the contracts received by petitioners.

OPINION

1. Allocation of Income under Section 446

The cash receipts and disbursements method of accounting used by Raybert is one of the acceptable accounting methods prescribed by section 446(c). Since the payments under "Easy Rider" statements Nos. 9 and 10 and "The Monkees" annual statement for the year ended July 23, 1970, had not been received when Raybert was liquidated on May 23, 1970, petitioners did not include those payments in the corporation's

SEC. 446. GENERAL RULE FOR METHODS OF ACCOUNTING.

(c) PERMISSIBLE METHODS.-Subject to the provisions of subsections (a) and (b), a taxpayer may compute taxable income under any of the following methods of accounting(1) the cash receipts and disbursements method;

(2) an accrual method;

(3) any other method permitted by this chapter; or

(4) any combination of the foregoing methods permitted under regulations prescribed by the Secretary or his delegate.

final taxable period. Respondent argues that prior to its liquidation, Raybert had "earned" the full amount of the payment on "Easy Rider" statement No. 9 and a proportionate part of the payments on "Easy Rider" statement No. 10 and "The Monkees" annual statement. Relying upon section 446(b), respondent seeks to include those payments in Raybert's taxable income for its final taxable period by recomputing Raybert's income under the accrual method of accounting.

Petitioners vigorously deny that Raybert, no longer in existence when the payments were received, had “earned” any of the disputed amounts attributable to the "Easy Rider" and "The Monkees" payments. They maintain that neither the accrual method of accounting nor any other recognized accounting method would include these payments in Raybert's income, and they argue that, within the meaning of section 446(b), respondent's determination distorts rather than "clearly reflect[s]" the corporation income for its final taxable period."

We are thus presented with the often-litigated question of whether payments received by the shareholders of a liquidating corporation with respect to assets distributed in liquidation are properly taxable to the corporation as income in its final taxable period or are properly taxable to the shareholders. See, e.g., Idaho First National Bank v. United States, 265 F.2d 6 (9th Cir. 1959); Standard Paving Co. v. Commissioner, 190 F.2d 330 (10th Cir. 1951), affg. 13 T.C. 425 (1949); Jud Plumbing & Heating v. Commissioner, 153 F.2d 681 (5th Cir. 1946), affg. 5 T.C. 127 (1945); Susan J. Carter, 9 T.C. 364 (1947), affd. 170 F.2d 911 (2d Cir. 1948). The rule to be gleaned from these cases is that a

Sec. 446(b) provides as follows:

(b) EXCEPTIONS.-If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary or his delegate, does clearly reflect income.

"Although the notice of deficiency reflects that sec. 482 is an alternative ground for the determination, respondent apparently abandoned this point on brief. Significantly, the notice of deficiency does not purport to "allocate" the income between any two parties but merely seeks to tax such income to Raybert. See South Lake Farms, Inc., 36 T.C. 1027, 1042 (1961), affd. 324 F.2d 837 (9th Cir. 1963).

The legal premise of these cases has been expressed as follows (Jud Plumbing & Heating v. Commissioner, 153 F.2d 681, 684 (5th Cir. 1946), affg. 5 T.C. 127 (1945)):

"it is a fundamental concept of taxation that income is chargeable to him who earns it, ***

"A corporation being a separate legal entity, its net earnings, whether ascertained or not, belong to it, *** and this liability cannot be discharged by the simple expedient of dissolution and the turning over of all its assets, including current and unreported income, to its sole stockholder, ***”

corporation is taxable on income which was "earned," or "accrued," or "realized," prior to its liquidation. Whether the words used are "belonged to," "earned," or "accrued," they all refer to "a taxpayer's fixed and determinable rights in a certain amount of income." (Emphasis supplied.) Shea Co., 53 T.C. 135, 156-157 (1969).

The rule, while easily stated, is not so easily applied to given factual situations. Application of the rule is guided by the fundamental principle that: "The dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create the right to receive it." Helvering v. Horst, 311 U.S. 112, 119 (1940); see Williamson v. United States, 155 Ct. Cl. 279, 283-287, 292 F.2d 524, 527-529 (1961); Jud Plumbing & Heating, Inc., 5 T.C. at 133. This pervasive "purpose" has led courts to allow respondent considerable discretion under section 446(b) to apply a method of accounting to the liquidating corporation's final taxable period which accurately reflects the reality of who earned or realized the income in question. See Idaho First National Bank v. United States, supra at 9; Standard Paving Co. v. Commissioner, 190 F.2d at 332; Floyd v. Scofield, 193 F.2d 594, 596 (5th Cir. 1952). The issue is basically factual, and each case turns on its own facts.9

While we recognize that section 446(b) gives respondent broad discretion, we sustain respondent's position only with respect to the payment under "Easy Rider" statement No. 9. The other disputed payments are not taxable to Raybert.

(a) "Easy Rider" statement No. 9.-The "Easy Rider" distribution agreement provided that Columbia would account on a monthly basis for all moneys payable to Raybert. The amounts payable to Raybert were determined by the difference between gross receipts from the picture and the allowable deductions for expenses and Columbia's fees for its services. All the relevant figures were computed on a monthly basis, and Raybert was entitled to a payment only if the gross receipts exceeded permissible deductions during the month.

• The law is settled that the Commissioner has authority under sec. 446(b) to recompute an item of a liquidating corporation's income under the accrual method of accounting even though the corporation has used the cash method in computing its income. See, e.g., Williamson v. United States, 155 Ct. Cl. 279, 287, 292 F.2d 524, 530 (1961); Idaho First National Bank v. United States, 265 F.2d 6, 9 (9th Cir. 1959); J. Ungar, Inc. v. Commissioner, 244 F.2d 90 (2d Cir. 1957), affg. 26 T.C. 331 (1956); Floyd v. Scofield, 193 F.2d 594 (5th Cir. 1952).