Tax Memorandum 1

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May 3, 2010
Tax File Memorandum

Subject Peaceful Pastures Funeral Home Incorporated prepaid income treatment.

Facts

Peaceful Pastures Funeral Home Inc. is an accrual basis taxpayer who sells prepaid goods and services to clients that will be provided for them at the time of their death. Goods and services are refundable upon the purchasers request at any time until the contracts are fulfilled. Peaceful Pastures Funeral Home Incorporated is in need of determining the period of recognition for income provide from a prepaid service for which they are an accrual basis taxpayer.

Issue

Does Peaceful Pastures Funeral Homes Inc. realize prepaid income in the period in which it was received or can Peaceful realize the income in the period in which the services are rendered?

Conclusion

Peaceful Pastures Funeral Homes Inc. must realize the income in the year that it receives prepaid income from a buyer and not in the year the goods and services are rendered. Therefore the IRS is correct and Peaceful may owe back taxes as well as penalties and interest on the amount of funds received as prepaid income in current and previous periods.

Analysis

The Internal Revenue Code imposes a Federal tax on the taxable income of every corporation. Sec. 11(a). Section 61(a) specifies that gross income for purposes of calculating such taxable income means “all income from whatever source derived”. Encompassed within this broad pronouncement are all “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 [47 AFTR 162] (1955). Stated otherwise, gross income includes earnings unaccompanied by an obligation to repay and without restriction as to their disposition. James v. United States, 366 U.S. 213, 219 [7AFTR 2d 1361] (1961). From the facts presented it seems that Peaceful enjoyed complete dominion over the prepaid funds. I find it significant that...
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