Acct 429
Tax File Memorandum #1
From:
Subject: Peaceful Pastures Funeral Home, Inc.
A tax issue that has been brought to me for assistance regarding an audit notice from the IRS for Peaceful Inc.
Facts: Peaceful provides a prepaid program that allows customers to pay in advance for their goods and services that will be provided to them on their funeral day. Under their contract, the payments are refundable at the contract purchaser’s request any time until the goods and services are provided to them. Peaceful is operating as an accrual basis taxpayer and has included these payments and income for the year the funeral service is provided.
Issue: Is the money paid in advanced to Peaceful under their prepaid program subject to tax the year it is received?
Conclusion: Prepaid amounts received by Peaceful Pastures Funeral Home, Inc. under the funeral’s prepaid program are includable in income only upon the provision of the funeral goods and services.
Analysis: Under the accrual method, 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. Typically, all events that fix the right to receive income have occurred upon the earliest of the following to take place: The income is (1) actually or constructively received; (2) due; or (3) earned by performance. As settled under the Supreme Court in Commissioner v. Indianapolis Power & Light Co.1990, a complete dominion test was preformed to identify the payments over which the taxpayer has such control as to render them income. Peaceful offers its customers the option for advanced payments and guaranteed a full refund under its contract. In relation to Johnson v. Commissioner 1997, advanced payments are then nontaxable the year of receipts and Peaceful’s right to retain these payments is contingent upon events outside its control.
From:
Subject: Peaceful Pastures Funeral Home, Inc.
A tax issue that has been brought to me for assistance regarding an audit notice from the IRS for Peaceful Inc.
Facts: Peaceful provides a prepaid program that allows customers to pay in advance for their goods and services that will be provided to them on their funeral day. Under their contract, the payments are refundable at the contract purchaser’s request any time until the goods and services are provided to them. Peaceful is operating as an accrual basis taxpayer and has included these payments and income for the year the funeral service is provided.
Issue: Is the money paid in advanced to Peaceful under their prepaid program subject to tax the year it is received?
Conclusion: Prepaid amounts received by Peaceful Pastures Funeral Home, Inc. under the funeral’s prepaid program are includable in income only upon the provision of the funeral goods and services.
Analysis: Under the accrual method, 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. Typically, all events that fix the right to receive income have occurred upon the earliest of the following to take place: The income is (1) actually or constructively received; (2) due; or (3) earned by performance. As settled under the Supreme Court in Commissioner v. Indianapolis Power & Light Co.1990, a complete dominion test was preformed to identify the payments over which the taxpayer has such control as to render them income. Peaceful offers its customers the option for advanced payments and guaranteed a full refund under its contract. In relation to Johnson v. Commissioner 1997, advanced payments are then nontaxable the year of receipts and Peaceful’s right to retain these payments is contingent upon events outside its control.