Attorney-at-Law

“I DON’T WANT TO GET ADJUSTED”

In Uncategorized on 08/16/2016 at 16:15

Mark L. Nebeker, 2016 T. C. Memo. 155, filed 8/16/16, is singing that old gospel song Pete Seeger and the Weavers sang sixty years ago at Carnegie Hall (and no, I wasn’t there, but I had rich friends who had the record).

Relying on his trusty CPA, Marty de K (name disguised), Mark tried to match his income with expenses, but as he reported it all on the Sched C as “cash basis,” that doesn’t fly.

Mark was a consultant; I’ll spare you the joke about the cat in the nighttime. Mark was a successful consultant, helping out some very heavy-hitting aerospace outfits. Mark had a bunch of subcontractors he had to pay whether or not the customers forked over. And sometimes the customers held off paying for 90 days or more. Or even into the next tax year.

Tell me about it.

Mark had to code his receipts and expenses very carefully, to match same with clients, because he might get a heavy-duty audit at any time from the Big Four beancounters who service the heavy hitters aforesaid.

So Marty de K, seeing Mark way behind in Year One of his one-man show, asked why Mark was sticking with the big cash loser. Mark showed what the heavies owed him.

Marty de K, who had credentials, set up the matching game for Mark.

So Mark deducted expenses in the tax year when he got paid, even though he’d paid those expenses in a previous tax year.

IRS says no. Mark and Marty de K say “any method that accurately states income.”

Judge Goeke has little to guide him, but goes with IRS.

“The parties give us little in the way of authority to address their disagreement, but section 1.446-1(c)(1)(iv)(a), Income Tax Regs., convinces us that respondent was correct to adjust the method the [Mark] used.  The more difficult question is whether respondent’s change requires the application of section 481.” 2016 T. C. Memo. 155, at p. 12 (Footnote omitted, but it’s coming).

Section 481 is the you-gotta-adjust-when-you-change-method-without-IRS-blessing.

Here’s the footnote: “Any combination of the methods of accounting set out in sec. 446 is permitted in connection with a trade or business if the combination clearly reflects income and is consistently used.  Sec. 1.446-1(c)(1)(iv)(a), Income Tax Regs. Here, use of the cash method in computing gross income from a trade or business necessitates use of the cash method in computing expenses of the trade or business.  Petitioner failed to clearly reflect income because he applied a method of deducting subcontractor expenses that was inconsistent with the cash method of accounting.  See, e.g., Grider v. Commissioner, T.C. Memo. 1999-417 (holding that a taxpayer’s method of accounting that is plainly contrary to the regulations does not clearly reflect income).” 2016 T. C. Memo. 155, at p. 12, footnote 3.

So it looks like Mark will have to get adjusted.

“Section 446(e) provides authority for respondent’s adjustment of [Mark’s]  method of accounting.  Section 446(e) provides that a taxpayer who changes the method of accounting on the basis of which he regularly computes his income in keeping his books shall, before computing his taxable income under the new method, secure the consent of the Secretary.  Petitioner never filed an application to change the method of accounting, nor did he follow the procedure for automatic consent laid out in Rev. Proc. 97-27, 1997-1 C.B. 680.  Under section 446(e) respondent can require [Mark] to abandon the new method of accounting and to report taxable income using the old method of accounting.” 2016 T. C. Memo. 155, at p. 13.

Section 446(e) precludes Mark from changing even if he asked for permission.

So Mark has to get adjusted, and IRS will help with a Section 155 beancount.

Mark also had a problem with advertising expenses he tried to take for some bike tours in Europe.

But Marty de K has enough credentials, and Mark enough innocence and straightforwardness, for Judge Goeke to give Mark a free ride on the chops.

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  1. […] Taishoff, “I DON’T WANT TO GET ADJUSTED” “Relying on his trusty CPA, Marty de K (name disguised), Mark tried to match his income with […]

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