Not all goods are inventory - or all accrual methods superior to cash

Article Abstract:

The Tax Court ruled in two cases that the decision of the IRS to require taxpayers to shift from the cash method to an accrual method was abusive. In the case involving Jim Turin and Sons Inc, the IRS mistakenly determined that the taxpayer must keep inventories, which meant that the accrual method is appropriate instead of the cash method. Based on Reg 1.471-1, inventories are required when production, purchase or sale of merchandise generates income. The court held that the emulsified asphalt used by the asphalt paving company is worthless after three hours and thus not merchandise held for sale. Inventories were thus not needed, obfuscating the accrual method required by the IRS. In the case involving the commercial printer Golden Gate Litho, the court found that the printed items were items held for sale and therefore merchandise. The production and sale of the items thus generated income, requiring an accrual method. However, the court found that the IRS did not use the appropriate accrual method.

Highways & Streets Constructn, Highway and Street Construction, Printing, Commercial Printing, Road construction industry, Road construction, Printing industry, Inventories, Inventory accounting, Jim Turin and Sons Inc., Golden Gate Litho

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Business cessation overrides ten-year method change

Article Abstract:

The case of Hospital Corp. of America provides illumination as to how business cessation overrides 10-year accounting method change. The taxpayer was an integrated group of corporations operating more than 200 for-profit hospitals, many of which employed a hybrid accounting method. Sec. 448 required this organization to make the transition to the overall accrual method for 1987 and allowed a 10-year adjustment period. The corporation disposed of a number of its hospitals during the first year of revision of Sec. 481(a) that resulted from being assigned the overall accrual method by Sec. 448. The portion attributed to the 104 disposed hospitals needed to be promptly incorporated into the account despite the fact that Sec. 448 allowed a 10-year period for including the adjustment in income.

Hospitals, Taxation, HCA Inc., Accrual basis accounting

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Attorney's fees awarded for Service's unjustified position

Article Abstract:

The Tax Court ruled in the 'Sicard' case that the IRS did not have reasonable justification for arguing that a taxpayer had employed a cash method for a payment from a partnership and therefore awarded attorney's fees under Sec. 7430 to the taxpayer. The IRS asserted that its cash method argument was reasonable due to the fact that the taxpayer did not include the income when accrued by the partnership. However, the court did not accept this, explaining that the IRS had not expressed any authority that supports its stance that the taxpayer had adopted an accounting method under the circumstances. Moreover, the court found that even if the taxpayer had chosen the cash method for a guaranteed payment, it would not be a proper method. The position of the IRS was thus not justified.

Attorneys, Lawyers, Income tax, Professional fees, Cash basis accounting

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