TAX MEMORANDUM

Table of Contents

TAX RESEARCH MEMORANDUM ISSUE # 13

From3

Subject3

Facts3

Issue3

Short Answer3

Analysis3

TAX RESEARCH MEMORANDUM ISSUE # 24

From4

Subject4

Facts5

Issue5

Short answer5

Analysis5

PASSIVE LOSS LIMITATION RULES6

Introduction6

Discussion7

Active v/s Passive Losses7

Oil and Gas Ventures7

Passive Loss Limitations8

CONCLUSION8

REFERENCES10

Tax Memorandum

Tax Research Memorandum Issue # 1

September 17, 2012

Tax Research Memorandum

From

Subject

Peaceful Pastures Funeral Home Inc. (Peaceful)

Facts

Peaceful offer the services to its customers for funeral and also provides them with the necessity goods that are required, for which the payments are made by the customers once the goods and services have been provided, however recently due to the increase in prices it has become difficult for customers to pay their bills thus the Peaceful had decided to ask its customers to pay in advance that is to prepay for their goods and services.

Issue

Should Peaceful include its prepaid income in its income for tax deduction?

Short Answer

Peaceful should include its prepaid income in its income for tax deduction, as it is an accrual basis taxpayer, according to which it is necessary to record all the income in the same year in which the transaction has been made, whether the payment has been made or not.

Analysis

Prepaid income is treated as a liability for the companies, as they have been paid for the goods and services before they have been provided. According to IRS a deduction needs to be made for taxes in the taxable year that is based on the method of accounting being used by the taxpayer (Blair, 2007). For accrual tax basis method, tax needs to be deducted in the same year in which the transaction has been made, or any liability that has been incurred, before the event of payment of liability. However there are certain different rules set for the treatment of recurring item. Regs. Sec. 1.461-1(a)(2)(i) states that tax is deductible in the same year only if it has been ensured that all the events have occurred that would determine the occurrence of a liability, the amount of liability can be determined accurately and economic performance has also occurred this is referred to as an “All Events Test”. Therefore it needs to be clearly defined the amount of liability with complete accuracy to record the prepay income for tax deduction (Fitzpatrick & Leib, 2012).

Since peaceful has decided to provide goods and services to its customers on a prepaid basis, it needs to make certain the amount at which this would be sold to them, moreover if this can be accurately identified then peaceful will not be obliged to include the liability in the same year for taxable deduction in which it has incurred thus it must be recorded in the year in which it has paid.

Tax Research Memorandum Issue # 2

Tax Research Memorandum

September 17, 2012

From

Subject

Acquisition of Little Corporation

Facts

Mega Corporation has acquired the assets of Little Corporation along with some of its liabilities. However Little Inc. was involved in a case related to patent infringement with Ideas Inc. and therefore is obliged to make payments for it to the company. Moreover Mega corp. Inc. has agreed to make the payments for ...