Tax Research Memorandum, Research Paper Example

Introduction

Peaceful Pastures Funeral Home, Inc. provides products and services related to a variety of funeral needs. Due to the increasing costs of doing business in the funeral industry, there have been many problems from a business perspective in obtaining money from customers for services rendered. Therefore, the company is considering an opportunity to provide prepaid services to their customers at more affordable rates, with the company reporting these funds as income in the reporting year in which the services were actually used. However, upon notice from the IRS, the company must examine whether or not the prepaid income that it has received thus far is taxable in the receiving year. The company currently questions whether or not this is an acceptable request.

Analysis

In order to determine if Peaceful Pastures is required to report its prepaid income in the appropriate year, it is necessary to evaluate tax law more efficiently. Based upon the facts stated in Comm vs. Indianapolis Power & Light Co.,, it should be noted that Peaceful Pastures holds the prepaid funds that it has received as a type of security deposit rather than true taxable income for the period in which it is received (1990). In the case, “In determining whether a taxpayer enjoys “complete dominion” over a given sum, the crucial point is not whether his use of the funds is unconstrained during some interim period. The key is whether the taxpayer has some guarantee that he will be allowed to keep the money. IPL’s receipt of these deposits was accompanied by no such guarantee” (1990). The money paid to the funeral home in advance of the services would fall under the same type of circumstance, and this reflects the idea that the company should not be required to report its findings as taxable income for that period. Since the concept of advance payment offers many advantages, it is evident that there are significant opportunities available when a company secures payment in advance of the services that will be provided at a future date (1990).

There are several types of contracts and/or agreements that funeral homes might enter into in order to establish relationships with customers for services in the future, whether they are fully planned or not planned but intended, as in Perry Funeral Home, Inc. v. Commissioner (2003). There are important considerations to make in this case, such as the following: “For accounting purposes, petitioner records payments received pursuant to preneed contracts as liabilities under the designation prearranged funerals. Petitioner does not recognize as income payments recorded on its books and records as prearranged funerals until the tax year in which the goods and services are provided. Petitioner does recognize interest and dividend income earned on the investments, exclusive of the BayBank escrow account, into which the preneed funds are deposited” (2003). In this context, it is observed that the company should not be held accountable for the manner in which they conduct their accounting records for these prepayments, because they should not be classified as taxable income for the year in which the payments were received. This is an important consideration because there are significant factors that could influence the manner in which organizations view prepaid services and related payments, as these are often observed by the IRS in a different fashion than some organizations.

References

Anand, V. (2002). 401(k) plans: Exxon Mobil goes passive in a big way. Retrieved from http://www.pionline.com/article/20020916/PRINTSUB/209160713

Chevron (2009). 2009 annual report. Retrieved from http://www.chevron.com/annualreport/2009/documents/pdf/Chevron2009AnnualReport_full.pdf

Shell (2010). Royal Dutch Shell plc updates on strategy to improve performance and grow. Retrieved from http://www.shell.com/home/content/investor/news_and_library/2010_media_releases/strategy_update_16032010.html