Tax Memorandum Essay

Fact: Peaceful Pastures Funeral Home, inc. (Peaceful). Peaceful, an accrual basis taxpayer provides a full line of funeral service and sells goods related to those services. Peaceful has attempted to design an approach that allows customers to prepay for their funeral goods and services.
Issue: IRS sent Peaceful an audit notice. It contends that the amount prepaid under Peaceful’s program constitutes prepaid income that must be included in Peaceful’s income (and therefore subject to tax) in the year in which it’s received.
Conclusion: Peaceful should pay the audit based on the facts. The IRS is correct according to the tax code and laws.
Analysis: Peaceful receive prepay from their customers for funeral goods and service, so Peaceful …show more content…
Consistent with the principle of section 451, section 446(a) and (b) directs that taxpayers are to compute taxable income using the method of accounting regularly employed for keeping their books, with the exception that “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, does clearly reflect income.” In general, the accrual method is designated a permissible method of accounting for purposes of section 446. Sec. 446(c)(2). Under the accrual method, income is to be included for the taxable year when all events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy. Secs. 1.446-1(c)(1)(ii), 1.451- 1(a), Income Tax Regs. Typically, all events that fix the right to receive income have occurred upon the earliest of the following to take place: The income is (1) actually or constructively received; (2) due; or (3) earned by performance. Schlude v. Commissioner, 372 U.S. 128, 133 [11 AFTR 2d 751] (1963); Johnson v. Commissioner, 108 T.C. 448, 459 (1997), affd. in part, revd. in part and remanded on another ground 184 F.3d 786 [84 AFTR 2d 99-5306] (8th Cir. 1999). [pg. 1971] As caselaw applying the above standards has evolved, it has become well established that amounts constituting advance payments for goods or services are includable in gross income in the year received.

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