Tax Research Memorandum
Peaceful Pastures Funeral Homes, Inc.
May 25, 2014
TAX FILE MEMORANDUM
FROM Karina Santos
SUBJECT Peaceful Pastures Funeral Home, Inc.
Peaceful Pastures Funeral Home, Inc. has contacted me for advice in regards to an audit notice rendered to them by the IRS. The incorporated funeral home wants to know if the IRS is correct when stating that Peaceful’s program has prepaid income that must be included in the company’s income and is subject to tax.
FACTS Peaceful is an accrual basis taxpayer that offers funeral services together with products related to the services. The company created a program, after experiencing bad debts and losses, that gives customers the opportunity to pay for goods and services in advance that will be incurred by them at the time of death. The contract included a promise to the purchasers to refund payments at any time up until the goods or services are rendered to them. Because peaceful is an accrual basis tax payer, the pre payments from the customers and income gained from them are subject to tax.
ISSUE Are the payments made in advance by the customers for Peaceful’s program considered prepaid income that is taxable at the end of the year?
CONCLUSION The prepaid income from the customers is realizable as income only in the year that Peaceful receives the pre-payments. This means that income is not realizable at the time that the goods and services are rendered. Because of this, the IRS was correct in issuing the audit. Peaceful is now responsible for paying back the taxes owed on the income that was considered taxable income for the year. Payments will include penalties and interest on the pre-payments provided. The prepaid income that peaceful was receiving through its program is included in the company’s income once the goods or services have been provided.
ANALYSIS Within the accrual method of accounting it is stated that income for the year is to be included once all goods and services have been...