Contents
Chapter 1
§1.01
§1.02
§1.03
§1.04
Introduction
Overview
Financial Accounting Vs. Tax Accounting
Why Learn Tax Accounting?
Tax Records Maintenance
Chapter 2 Tax Accounting Doctrines
§2.01 Annual Accounting Doctrine
§2.02 Claim Of Right Doctrine
(a) Effect Of Doctrine
(b) Circumstances Where Doctrine Applies
(c) Uncertainty Of Income Status Or Amount
(d) Restrictions On Disposition
(e) Funds Received By Agent Or Trustee
(f) Prepaid Income Issues
(g) Bona Fide Nature Of Claim
(h) Repayment Of Claim-Of-Right Income
(1) Generally
(2) Agreement To Repay
(3) Deduction In Case Of Repayment
(i) Pending Disputes
(j) Violations Of Law; Illegitimate Claims
§2.03 Section 1341 Relief For Repayment Of Claim Of Right Receipts
(a) Generally
(b) Conditions Necessary For Section 1341 Relief
(c) Tax Calculation Under Section 1341
(d) $3,000 Limitation
§2.04 The Arrowsmith Doctrine
§2.05 The Tax Benefit Rule
Chapter 3
§3.01
§3.02
§3.03
§3.04
The Entity’s Tax Year
Introduction
Calendar Year
Fiscal Year
Adoption, Change Or Retention Of Taxable Year
(a) Adoption Of Taxable Year
(b) Change Of Taxable Year
(c) Retention Of Taxable Year
(d) Commissioner’s Pronouncements
(e) Approval Of Commissioner
(1) Generally
(2) “Business Purpose”
(3) Natural Business Year
(4) Ruling Requests
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§3.05
§3.06
§3.07
§3.08
§3.09
§3.10
§3.11
Chapter 4
§4.01
§4.02
§4.03
§4.04
§4.05
§4.06
(5) Automatic Approvals
Required Tax Year(s)
Ownership Taxable Year
Corporations
(a) Generally
(b) Initial Tax Year
(c) Personal Service Corporations
(d) S Corporations
Partnerships
(a) Generally
(b) Rule #1: Majority Interest Rule
(c) Rule # 2: Principal Partner Rule
(d) Rule # 3: Least Aggregate Deferral Rule
(1) Generally
(2) Procedural Requirements
(3) Special De Minimis Rule
Section 444 Election
(a) Generally
(b) Filing Requirements
(c) Required Payments/Distributions
(1) Generally
(2) Required Payment For Partnership Or S Corporation
(3) Required Distribution For Personal Service Corporation
(4) Failure To Make Required Payments
(d) Ending The Election
Back-Up Section 444 Elections
(a) Generally
(b) Making The Election
(c) Activating The Election
Correction Of Erroneous Tax Year
Methods Of Accounting
Overview
The Timing Issue
Selecting An Accounting Method
Book Conformity Rule
Conversion Work Papers
“Material Items”
(a) Generally
(b) Immaterial Items
(c) “Different” Items
§4.07 “Clear Reflection Of Income”
§4.08 “Consistency” And “Predictability”
(a) Generally
(b) Multiple Businesses
(c) Computational Errors
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§4.09 “Adopted” Accounting Method
(a) Generally
(b) Mechanics Of Adoption
(c) New Entities
§4.10 Restrictions On Use Of Accounting Methods
Chapter 5
§5.01
§5.02
§5.03
§5.04
§5.05
§5.06
§5.07
§5.08
§5.09
§5.10
§5.11
§5.12
§5.13
§5.14
§5.15
§5.16
§5.17
§5.18
The Cash Receipts And Disbursements Method
Generally
Income Recognition
Cash Equivalency Doctrine
(a) Generally
(b) Receipt Of Property
(1) Generally
(2) Intangible Property
(c) Fair Market Value
Constructive Receipt Doctrine
(a) Generally
(b) Economic Benefit Doctrine
(c) Power To Collect
(d) Substantial Limitations Or Restrictions
Check “Income”
Interest Income
Dividend Income
Rental Income
Lottery Prize Proceeds
Escrow Agreements
Deferred Payment Agreements
Expenses-Deductions
(a) Generally
(b) Constructive Payment
Note/Check Payments
Borrowed Funds, Payment With
Prepaid Expenses
Prepaid Period Costs
(a) 12-Month Rule
(b) Exceptions To 12-Month Rule
(c) Elective Capitalization
Interest Expenses
(a) Prepaid Interest
(b) Rule Of 78’s
(1) Generally
(2) Prepayment Of Principal
Limitations On Cash Method’s Use
(a) Generally
(b) Section 467 Rental Agreements
(c) Section 448 Entity Limitations
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(d)
Qualified Personal Service Corporations
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Chapter 6 The Accrual Method
§6.01 Generally
§6.02 Income Recognition
(a) Fixed Right To Receive Income
(b) Conditions Precedent
(c) Conditions Subsequent
(d) Passage Of Title And Business Practice
(e) Amount Realized
(f) Doubts About Collectability
(g) Nonaccrual-Experience Method For Services Receivable
§6.03 Prepaid Income
(a) Generally
(b) “Trilogy Cases”
(c) Deferral Of Income Under Rev. Proc. 71-21
(1) Generally
(2) Illustrative Applications
(d) Advance Payments Under Rev. Proc. 2004-34
(1) Generally
(2) What Are Not Advance Payments
(3) Permissible Methods Of Accounting
(e) Advance Payment For Goods
(f) Prepaid Dues Income
(g) Prepaid Subscription Income
§6.04 Deposits As Income
§6.05 Trading Stamps And Coupons
§6.06 Service Warranty Income
§6.07 Expenses-Deductions
(a) Generally
(b) Fixed Liability Requirement
(c) Contingent Liabilities
(d) Amount Of Liability
§6.08 “Economic Performance” And Accrual Of Expenses
(a) Generally
(b) When Economic Performance Occurs
(c) 3 ½ Month Exception
(d) Recurring Items Exception
(1) Generally
(2) Time And Manner Of Adopting The Recurring
Item Exception
(3) Payment To Another Person
(4) Person To Whom Payment Is Made
(5) Miscellaneous Exceptions
(e) Long-Term Contracts
§6.09 Real Property Taxes
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(a) Accrual Of Taxes
(b) Limitation On Double Accrual
§6.10 Disputed Liabilities
§6.11 Deferred Compensation Deductions
(a) Generally
(b) Section 404 Deductions
(c) Section 267 Deduction
Chapter 7 Change In Accounting Method
§7.01 In General
(a) What Constitutes A Change In Accounting Method
(b) What Is Not A Change Of Accounting
(c) ”Material Items”
(d) Adoption Of A Method Of Accounting
(e) Change In Underlying Facts
§7.02 Taxpayer-Initiated Changes
(a) Generally
(b) Two Or More Trades Or Businesses
(c) Consolidated Groups
(d) Audit Protection For Taxable Years Prior To Year Of Change
(e) District Director’s Review
§7.03 Commissioner’s Consent
(a) Generally
(b) Procedures For Obtaining Consent
(1) Generally
(2) Changes Effected By Rev. Proc. 97-27
(c) Terms And Conditions
(d) Noncompliance With Provisions
(e) Section 446(f) Sanctions
(f) Effect Of Consent; Subsequent Modifications
(g) Automatic Consent
§7.04 Taxpayer Applications For Change (Form 3115)
(a) Generally
(b) Protective Applications
(c) Time For Filing
(1) Generally
(2) Late Filing
(d) Where To File
(e) User Fee
(f) Signature Requirements
(g) Facts And Circumstances Considered
(h) Incomplete Applications
(i) Conference Requests
(j) IRS Discretion To Process Application
(k) Taxpayers Under Examination
(1) Prohibition On Filing
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§7.05
§7.06
§7.07
§7.08
§7.09
§7.10
§7.11
(2) 90-Day Window Period
(3) 120-day Window period
(4) District Director’s Consent
(5) Taxpayer Before An Appeals Office
(6) Taxpayer Before A Federal Court
(7) Terms And Conditions Of Change
(l) Prior Applications
(1) Generally
(2) LIFO Inventory Method Change
(3) Changes Not Made
Consent Agreements
(a) Generally
(b) Signature Requirements
(c) Rejection By Taxpayer
Year Of Change
Section 481 Adjustment
(a) Generally
(b) Historical Background
(c) Application Of Adjustment
Section 481(a) Adjustment Period
(a) Generally
(b) Short Period As A Separate Taxable Year
(c) Shortened Or Accelerated Adjustment Periods
IRS-Initiated Changes
(a) Generally
(b) Change In Sub-Method
(c) Prior Year Changes
(d) Criminal Investigations/Proceedings
(e) Examining Agent’s Discretion
(f) Treatment Of Accounting Method Issues
(g) Selection Of New Method Of Accounting
(h) Year Of Change
(i) Section 481(a) Adjustment
(j) Audit Protection
(k) Example
Automatic Consent Procedures
Hat Creek Problem
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Chapter 8
§8.01
§8.02
§8.03
§8.04
§8.05
§8.06
§8.07
§8.08
§8.09
§8.10
§8.11
§8.12
§8.13
§8.14
§8.15
§8.16
§8.17
Inventory
Overview
“Best Accounting Practice”
“Clear Reflection Of Income”
Election Of Accounting Method
Unacceptable Accounting Methods
Use To Determine “Gross Income”
Cost Flow Assumptions/Methods
(a) Generally
(b) Specific Identification Method
(c) FIFO Method
(d) LIFO Method
Valuation Methods
(a) Generally
(b) “At Cost” Valuations
(1) What Is “Cost”
(2) Discounts
(3) Advance Rebates
(4) Acquisition Costs
Lower-Of-Cost-Or-Market Valuation
(a) Generally
(b) Market Value Determination
(c) “Normal” Goods
(d) Excess Inventory
(e) “Subnormal” Goods
(1) Generally
(2) Tax Treatment: Net Realizable Value
(3) Year Of Worthlessness
(4) Recordkeeping Requirements
(5) Illustration Of Method
Inventoriable Items
Noninventoriable Items
Periodic Physical Counts
Spare Parts
(a) Inventory Treatment
(b) Non-Inventory Treatment
Containers
Supplies
Shrinkage
(a) Deduction In Year Of Loss
(b) Shrinkage Estimates
Passage Of Title To Goods
(a) Generally
(b) Inclusion Rules
(c) Judicial Decisions
(d) C.O.D. Sales
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(e) Consignments
(f) Sale Or Return Contracts
(g) Shipments On Approval
(h) Where Title Is Not Controlling
§8.18 Cash Basis Taxpayers
(a) Historical Position Of The IRS
(b) “Substantial Identity Of Result” Doctrine
(c) Retreat From Historical Position: Recent Developments
§8.19 Qualifying Small Business Taxpayer
(a) Qualifying Small Business Taxpayer Exception
(b) Qualifying Small Business Taxpayer
(c) Average Annual Gross Receipts
(d) Inventoriable Item Defined
(e) Open Accounts Receivable Defined
(f) Automatic Change For Taxpayers
(g) Single Form 3115
(h) Section 481(a) Adjustment
Chapter 9 Uniform Capitalization Rules
§9.01 Overview
§9.02 Application Of Rules
(a) Generally
(b) Exemptions
§9.03 Taxpayers/Activities To Which Rules Are Applicable
(a) Generally
(b) Trade Or Businesses Application
(1) Generally
(2) Tax Planning Considerations
(c) Production Activities
(1) Generally
(2) Taxpayers Engaged In “Production Activities”
§9.04 Property Subject To Unicap
(a) Generally
(b) “Small Reseller” Exemptions
(1) Generally
(2) “Average Annual Gross Receipts” Determination
(3) Resellers With Production Activities
(4) Property Produced Under Contract
(c) Long-Term Contract Exemption
(d) Property Provided Incident To Services Exemption
(e) Small Producers Exemption
(f) Examples
§9.05 Costs Subject To Unicap
(a) Generally
(b) Definitions
(1) Section 471 Costs
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(2) Section 263A Costs
(3) Additional Section 263A Costs
(c) Producers
(d) Resellers
(e) Costs Not Capitalized
§9.06 Purchasing Costs
§9.07 Labor Costs
§9.08 Handling Costs
(a) Generally
(b) Processing Costs
(c) Assembling Costs
(d) Repackaging Costs
(e) Transportation Costs
(f) Costs Not Capitalized
§9.09 Storage Costs
(a) Generally
(b) On-Site Storage Facilities
(c) Off-Site Storage Facilities
(d) Dual-Function Storage Facilities
§9.10 Service Costs
(a) Generally
(b) Capitalizable Service Costs
(c) Deductible Service Costs
§9.11 Mixed Service Costs
(a) Generally
(b) Allocation Of Costs
(1) Generally
(2) De Minimis Rule
(3) Taxpayers With Both Production And Resale Activities
(4) Entire Cost Of Department
(5) “Facts And Circumstances” Method
§9.12 Simplified Service Cost Methods
(a) Producers
(1) Generally
(2) Operational Rules
(3) Production Cost-Based Method
(4) Labor Cost-Based Method
(5) Examples
(b) Resellers
(1) Generally
(2) Operational Rules
(3) Formula To Be Applied
§9.13 Allocation Of Direct And Indirect Costs
(a) Generally
(b) Restrictions
(c) Disallowed Methods
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(d) Multiple Trades Or Businesses
(e) Taxpayers With Both Production And Resale Activities
(f) Entire Cost Of Department
§9.14 Simplified Production Method Without Historical
Absorption Ratio Election
(a) Generally
(b) Application Of Method
(c) Examples
§9.15 Simplified Resale Method Without Historic Absorption Ratio Election
(a) Generally
(b) Combined Absorption Ratio
(c) Storage And Handling Absorption Ratio
(d) Purchasing Absorption Ratio
(e) Section 471 Costs Remaining On Hand At Year-End
(f) Examples
§9.16 Interest Capitalization Rules
(a) Generally
(b) “Interest” Defined
(c) Eligible Debt
(1) Generally
(2) Categories Of Debt
(d) Avoided Cost Method
(e) De Minimis Exception
(f) Treatment Of Capitalized Interest
(g) Units Of Property
(h) Functionally Interdependent Components
(i) Installation Activity
(j) Common Features
(k) Computation Periods
(l) Measurement Dates
(m) Rules Of Interest Capitalization
(1) Rule 1
(2) Rule 2
(3) Rule 3
Chapter 10 Installment Method/Sales
§10.01 Generally
§10.02 Benefits/Detriments
§10.03 Application Of Method
(a) Generally
(b) Exceptions
§10.04 Taxpayers Not Applying Method
(a) Generally
(b) Cash Basis Taxpayers
(c) Accrual Basis Taxpayers
§10.05 Computation Of Gain
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(a) Generally
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(b) Gross Profit
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(c) Selling Price
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(d) Contract Price
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(e) Qualifying Indebtedness
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(f) Payment
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(g) Selling Expenses
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§10.06 Recapture Income
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§10.07 Contingent Payment Sales
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(a) Generally
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(b) Stated Maximum Selling Price
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(1) Generally
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(2) Reduction/Recomputation Of Price
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(c) Sales With Fixed Payment Period
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(d) Sales With No Maximum Selling Price Or Fixed Payment Period 225
(e) Income Forecast Method
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(1) Generally
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(2) Calculations
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(3) Video Gaming
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(f) Other Rules
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§10.08 Dealer Rules
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(a) Generally
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(b) Dealers In Real Property
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(c) Dealers In Personal Property
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(d) Farm Property
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(1) Generally
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(2) Carrying Charges
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(e) Residential Lots And Timeshares
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(1) Generally
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(2) Interest Charges
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(3) Carrying Charges
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§10.09 Related Party Rules
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(a) Generally
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(b) Sale To Related Person Followed By Second Disposition
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(c) Involuntary Dispositions
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§10.10 Non-Dealer Rules
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(a) Generally
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(b) The Interest Rule
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(1) Generally
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(2) Application Of Rule
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(3) Computation Of Interest
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(c) The Pledge Rule
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§10.11 Mortgages And Other Liabilities
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(a) Generally
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(b) Assumption Of Mortgage
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(c) Wrap-Around Mortgages
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§10.12 Disposition Of Installment Obligations
§10.13 Modification Of Installment Obligations
(a) Generally
(b) Minor Modifications/Non-Taxable Dispositions
(c) Substantial Modifications/Taxable Dispositions
(d) Transfers Of Installment Obligations At Death
(e) Debt Instrument Modifications Under Section 1001
§10.14 Default And Repossession Of Real Property
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Chapter 11 Long-Term Contracts
§11.01 Generally
§11.02 Manufacturing Contracts
(a) More Than 12 Months To Complete
§11.03 Construction Contracts
(a) Generally
(b) De Minimis Construction Activities
§11.04 Completed Contract Method (CCM)
(a) Home Construction Contracts
(b) Small Contractors
§11.05 Percentage Of Completion Method (PCM)
(a) Application Of Method
(b) Exceptions
(1) Exempt Contracts
(2) Residential Construction Contracts
(c) Computation Of Income
(1) Computational Steps
§11.06 10-Percent Method
§11.07 Look-Back Method
(a) Generally
(b) Exceptions
(c) Operation Of Method
(d) Reporting Of Interest
(e) Tax Treatment Of Interest
§11.08 Special Rules
(a) Terminated Contracts
(b) Mid-Contract Change In Taxpayer
(1) Step-In-The-Shoes Transaction
(2) Constructive Completion Transaction
§11.09 Accounting Method Change
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Chapter 12 Domestic Manufacturing Deduction
§12.01 Generally
§12.02 Application Of Deduction
§12.03 Eligible Taxpayers
§12.04 Qualified Production Activities Income
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§12.05 Domestic Production Gross Receipts
(a) Generally
(b) MPGE “In Significant Part”
§12.06 Qualified Production Income
§12.07 Allocation Of Gross Receipts
(a) General Method
(b) Simplified Methods
(1) Generally
(2) Small Taxpayers
(c) De Minimis Rule
§12.08 Expanded Affiliated Groups
§12.09 Partnerships
(a) Generally
(b) Disallowed Deductions
§12.10 S Corporations
(a) Generally
(b) Disallowed Deductions
§12.11 Filling In Form 8903
Exhibits
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