TAX RESEARCH MEMORANDUM ASSIGNMENT 1
May 25, 2014
TAX FILE MEMORANDUM
FROM Najia Saidy
SUBJECT Peaceful Pastures Funeral Homes Inc.
Today I spoke with my clients from Peaceful regarding an audit notice sent from the IRS. They want my assistance in dealing with the matter which is why I am sending this letter to you.
FACTS Peaceful is a funeral home business that provides a full line of funeral services and sells goods related to those services. Over that last few years, the increase of costs for goods sold have risen dramatically, which has hurt Peaceful two different ways: 1. Customers are not able to pay for their entire bill at one time, 2. Customers are choosing goods and services that cost much less, thus creating losses for Peaceful. Because of all this, Peaceful has decided to offer a discounted refundable prepaid program that allows the customer to cancel prior to the goods and services being delivered. Peaceful uses an accrual basis, and has included these payments and income for the year the funeral service is provided.
ISSUE Does the amount prepaid from Peaceful’s new program constitute prepaid income that must be included in Peaceful’s income in the year that it is received?
CONCLUSION Peaceful should have realized the income in the year that it receives prepaid income from a buyer and not in the year the goods and services are delivered. Therefore, I agree with the IRS audit and Peaceful may owe back taxes in addition to any statutory charges such as penalties and interest.
ANALYSIS Peaceful recognizes the payments as income in the year that the goods and services have been provided to the customer who has made the payments. Under Federal Taxation Principles, the accrual method states that 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....