Examination
Question 1 - Acme Corporation, a calendar year C Corporation, is currently under examination by the Internal Revenue Service for the years 2014 through 2015. The examination began in October of 2015. Since the examination seems to be dragging and not going particularly well, Acme's controller is has recently engaged you to manage the audit.
When preparing for your first meeting with the Agent, you notice that Acme is using the reserve method for bad debts for both book and tax purposes. This is an improper tax accounting method. When reviewing Acme's tax returns, you obtain the following information:
Tax year ending 3/31/15 - Reserve for bad debts at 3/31/14 is $800,000. Bad debt expense for the year is $350,000. Net bad debt charge offs are $300,000. Reserve for bad debts at 3/31/15 is $850,000.
Tax year ending 3/31/16- Bad debt expense for the year is $400,000. Net bad debt charge offs are $450,000. Reserve for bad debts at 3/31/16 is $800,000
Tax year ending 3/31/17 - Bad debt expense for the year is 600,000. Net bad debt charge offs are $500,000. Reserve for bad debts at 3/31/17 is $900,000
Tax year ending 3/31/18 - So far, net bad debt charge offs are $550,000.
How would you advise Acme to proceed in this situation? What important questions would you want to ask Acme's controller?
What are the tax consequences by year if the IRS initiates the change of accounting method? Can the taxpayer initiate a change of accounting method? Why or why not? Assuming the taxpayer can initiate a change what are the tax consequences by year?
Question 2 - Hastros Corp, an accrual method, calendar year C Corporation, had a very successful year in 2017, and had the following transactions:
Hastros has received $1,000,000 in cash for advance ticket sales for the 2018 season. For book purposes Hastros has deferred reporting the income until earned in 2018. In what year(s) should Hastros report this income for tax purposes? Will this result in a Schedule M difference between book and tax?
Some fans were so concerned about the availability and prices of tickets that they have already paid Hastros $150,000 in cash covering the price of tickets for the 2018, 2019 and 2020 seasons ($50,000 per year). For book purposes Hastros has deferred reporting the income until earned in 2018, 2019 and 2020. In what year(s) should Hastros report this income for tax purposes? Will this result in a Schedule M difference between book and tax?
Question 3 - On January 1, 2017, Seller Corp and Buyer Corp closed on the sale of land and a vacant warehouse for $60,000,000 with the following payment terms: Buyer Corp paid $8,000,000 at closing. Buyer Corp assumed $24,000,000 in existing mortgage debt. Buyer Corp will issue Seller Corp a note with adequate interest that requires principal payments to Seller Corp. of $7,000,000 to Seller Corp on January 1, 2018, 2019, 2020, and 2021.
Seller has owned the property for many years, and has a tax basis in the land and building of $16,000,000.
Compute the impact that this transaction will have on taxable income of Seller Corp. for the tax years 2017 -2021 assuming no special elections are made?
If the note did not provide for the payment of interest, how would that change your answer? Please provide a general answer to this part of the Problem / Question. You do not need to provide detailed computations.
If the note issued by Buyer Corp was payable on demand, how would that change your answer? Please provide a general answer to this part of the Problem / Question. You do not need to provide detailed computations.
Question 4 - 1. In general, is it more or less difficult to take an inventory market writedown for tax purposes compared with book purposes? Give an example.
2. In general, does the application of the UNICAP rules under IRC Section 263A produce higher inventories for tax than for book? Will this result in higher or lower taxable income than book income? Give an example.