November 16, 2012
TAX FILE MEMORANDUM
Peaceful Pastures Funeral Home, INC. taxpayer engagement. FACT
Peaceful Pastures Funeral Home, INC (“Peaceful”) has designed an approach that allows customers to prepay for their funeral goods and services. Under this program, the customer pays in advance for the goods and services that will be provided at the time of their death, often at a significant discount. Under the terms of the contract, the payments are refundable at the contract purchaser's request any time until the goods and services are provided to them. Given that it is an accrual basis taxpayer, Peaceful has included these payments and income for the year the funeral service is provided.
IRS has sent Peaceful a notice stating that the income received under their program constitutes as prepaid income and therefore must be included in the year the payment is received.
Peaceful does not have to recognize payments received on their ‘pre-payment program’ contracts as prepaid Income.
ANALYSIS Peaceful (seller) recognizes the payments as income in the year that the goods and services have been provided to the contract holder (buyer) who has made the payments. Under Federal Taxation Principles, the accrual method states that 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.
As per the Supreme Court, an advance payment, such as pre-payment for services or deposits, protects the seller against the risk that they might not be able to collect money after goods or services have been utilized. The Supreme Court in Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203 [65 AFTR 2d 90-394] (1990). supra at 210, established what is referred to as the “complete dominion” test for identifying those payments over which the taxpayer...
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