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Chapter 16 Accounting Periods And Methods
Research Problems
Research Problem 1. Your client is not permitted to deduct a year-end accrual for vacation pay earned but not paid. This result occurs because the tax law considers this to be deferred compensation that is ineligible for the recurring item exception, unless it is paid by March 15 of the year following the accrual [see §§ 404(a)(5) and (6)]. Your client has asked whether the related accrued Social Security taxes on the vacation pay can be accrued under the general recurring item exception because these taxes will be paid by the fifteenth day of the ninth month after the close of the tax year.
Research Problem 2. Your client supplies water to a housing development. The company requires new customers to pay for the extension of the water lines to their homes. The water lines are the company’s property. The company has consistently treated the amounts received from its customers as a nontaxable contribution to capital and used the amounts received as a reduction in the cost of the water lines for tax purposes. In recent decisions, the courts have consistently ruled that the payments received from the utility customers in similar circumstances should be treated as income from services, rather than as a contribution to capital. Your client has concluded that it is only a matter of time before the IRS applies the recent court decisions to the company. The client would like you to explain the tax consequences of the
IRS’s likely adjustments based on these decisions.
Research Problem 3. Your client is a manufacturer. For several years, the company buried empty paint cans on its property. The paint was used in the production process.
Recently, a state environmental agency informed the company that it was required to dig up the paint cans and decontaminate the land. The company spent a substantial amount for this environmental cleanup in the current year. An IRS agent contends that the cost must be added to the basis in the land because the cleanup improved the land. The company’s CFO has asked you to determine whether any authority exists that would support a current deduction for these costs.
Research Problem 4. In 2016, your client, Clear Corporation, changed from the cash to the accrual method of accounting for its radio station. The company had a positive § 481 adjustment of $2.4 million as a result of the change and began amortizing the adjustment in 2016. In 2017, Clear received an offer to purchase the assets of the radio station business (this would be considered a sale of a trade or business under § 1060). If the offer is accepted, Clear plans to purchase a satellite television business. Clear has asked you to explain the consequences of the sale of the radio station on the amortization of the § 481 adjustment.
Research Problem 5. Why did the AICPA object to former Congressman Dave Camp’s tax reform proposal introduced in February 2014 (later officially introduced as H.R. 1 of the 113rd Congress) regarding the use of the cash method of accounting?
Roger CPA Review Questions
1. Abbott (an S Corporation), Bell, Costello, and Dilbertson form Best Partnership, an equally shared partnership. Each partner but Abbott has a December 31 tax year-end;
Abbott’s is June 30. The partners would like to choose a partnership tax year other than one ending December 31, but do not have a valid business purpose for doing so. Which of the following is an acceptable tax year-end theymay choose for Best Partnership?
I. December 31
II. September 30
III. June 30
a. I and II only
b. I only
c. I, II, or III
d. I and III only
2. LaJoie, Bhatti, and Jenkins are going to form LBJ Partnership. The ownership interests and tax years of the partners are as follows:
Partner Partnership Interest Tax Year-Ends
LaJoie 20% January 31
Bhatti 40% June 30
Jenkins 40% December 31
According to Reg. § 1.706–1(b) (3), what is LBJ Partnership’s required tax year-end?
Assume no business purpose for a different taxable year.
a. January 31
b. July 31
c. December 31
d. June 30
3. Slater Slopes is a newly formed ski resort partnership with a natural business year ending May 31. The ownership and tax years of its three partners are as follows:
Partner Partnership Interest Tax Year-Ends
A. Slater 20% December 31
Excelsior Enterprises 40% November 30
Pinnacle Productions 40% November 30
Which of the following is an acceptable year-end for Slater Slopes? Consider both § 706 and § 444.
I. May 31
II. November 30
III. September 30
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
a. II only
b. I and II only
c. I only
d. I, II, and III
4. The cash method of accounting may be used for tax reporting purposes by which of the following taxpayers?
a. A partnership with a C corporation—one with annual revenue exceeding $5 million—as a partner
b. A C corporation with annual revenue of $2.5 million which has physical inventory levels that are material in amount
c. A farming corporation
d. A partnership with a personal service C corporation—one with annual revenue below $5 million—as a partner