§461 Reading Questions ANSWERS Bus 223F

Question 1a, 1b, 1c When may a cash method taxpayer deduct: a. pays under protest (contested payment) b. pays using a credit card (Rev Rul and Rev Rul 78-39) c. pays with a check post-dated for next year (Griffin v Comm'r, 49 TC 253 (1967))

Question 1d, 1e, 1f d. pays with a non-sufficient funds check on 12/30/00, when the check gets to the bank on 1/3/01, the bank covers the check using the payor's ready reserve funds e. transfers money to mortgagee for future property tax payments f. pays with funds borrowed from a third party (Granen v Comm'r, 55 TC 753 (1971))

Question 1g, 1h, 1i g. pays interest on debt with additional funds borrowed from same lender (Battlestein, 47 AFTR 2d , 631 F2d 1182, 80-2 USTC ¶9840 (5th Cir.); Burgess, 8 TC 47 (1947); Wilkerson, 48 AFTR 2d , 655 F2d 980, 81-2 USTC ¶9657 (9th Cir.)) h. check mailed on 12/30/00 and cashed by payee on 1/2/01 (Rev. Rul ; Estate of Witt v Fahs, 56-1 USTC ¶9534 (S.D. Fl. 1956)) i. gives own note to payee (Rev. Rul ; Rev. Rul ; Eckert v Burnet, 283 US 140 (1931)) j. Mr. Ajax pays his California fourth quarter estimated tax payment due 1/15/01, on 12/31/00 (Rev. Rul )

Question 1j, 1k, 1l k. $12,000 paid on 12/1/00 for truck rental, rental period is 12/1/00 to 11/20/01; payment due 12/1/00 l. $20,000 paid on 12/1/00 for truck rental, rental period 12/1/00 to 7/31/02; payment due 12/1/00 m. $24,000 paid on 12/1/99 for crane rental, rental period 1/1/ /31/00, payment due 1/10/00

Question 1m, 1n, 1o n. artist pays a business expense with one of her paintings o. points paid on 2/1/00 to acquire a principal residence; loan term is 30 years (Rev Proc 94-27)

Question 2 - Zaninovich Why did the Ninth Circuit view the Zaninovich case differently than the IRS and the Tax Court?

Question 3 – EP purpose Why was §461(h) added to the Code (economic performance requirement)?

Question 4 – estimated expense Why might an estimated expense fail the first prong of the all events test?

Question 5 – Hughes Properties Do you agree with the majority or the dissenters in U.S. v. Hughes Properties, 476 US 593 (1986)? WHY? Is this case still relevant today?

Question 6 – 461(f) and state taxes and interest from tax audits Why couldn't the taxpayer in the Consolidated Industries case deduct the amount per §461(f)?

Question 7 – accrual examples When may H Corporation, an accrual method, calendar year taxpayer deduct the following items. If more information is needed, state what it is and why it is needed. a. $24,000 paid on 4/1/00 to its security protection service for a 2-year period from 4/1/00 to 3/31/02? Would the result change if the contracted was entered into (executed) on 12/20/99? (RR ) b. $24,000 paid on 4/1/00 to its insurance broker for coverage from 4/1/00 to 3/31/02? c. $10,000 paid to an independent contractor on 4/1/01?

Question 8 – warranty expense Supercomputers, Inc., offers its customers a 1-year warranty on computers. In preparing its 2003 financial statements, S's controller computes that the 2003 sales should increase the warranty reserve by $60,000. She also estimates that 80% of this warranty work will be completed by 9/15/04. S has adopted the recurring item exception for all of its recurring expenses. How much should S deduct with respect to the 2003 warranty costs in 2003 and 2004?

Question 9 – tax exam interest expense G Corporation and the IRS concluded the examination of G's 1996 and 1997 tax returns with an agreed tax deficiency of $200,000. Interest on this deficiency was $28,000. G is an accrual method, calendar year taxpayer and paid the deficiency on 5/1/99. When may it deduct the $28,000 of interest expense?  Also see Rev Rul (next slide)

Rev. Rul , CB 37 “During the taxable year 1968 a deficiency in the Federal income tax for the taxable year 1966 was asserted against a corporation that uses the accrual method of accounting. The deficiency was contested in the Tax Court. In the taxable year 1970 the court determined that the tax was due. The decision of the court was not appealed and the deficiency and the interest thereon were paid. Held, the entire interest on the deficiency in Federal income tax for the year 1966 accrues in the taxable year 1970 when the liability for the deficiency was finally determined and is an allowable deduction under section 163 in the year Held further, if the deficiency had not been contested and the deficiency had been agreed to when it was asserted in 1968 the interest on the deficiency should have been accrued and deducted in that year.”

Question 10 - contingency On 3/1/00, Borrower Corp. issued $1,000,000 convertible debentures that accrue interest at 4% payable on 9/1 and 3/1 of each year. The debentures are convertible at the holder's option into common stock, at any time. Per the terms of this arrangement, the holder would not receive any interest that had accrued from the last interest payment date to the conversion date. B wants to know if at 12/31/00 it may deduct 4 months worth of interest (9/1 - 12/31) or must it wait until the next interest payment date (3/1/01)? Explain.

Question 11 - rebates AB Computers sometimes offers rebates for some of its products. For example, in 2008, buyers of the X Computer could mail in a form and their purchase receipt and get a $20 rebate. Based on prior practice, X knows that 70% of the customers will request a rebate. For both book and tax purposes, AB books its sales net of the rebate it expects to pay (70% x $20). Appropriate journal entries are made when a customer receives a rebate or a coupon expires. Is this treatment permissible for tax purposes?

Question 12 - §174 May a corporation expense R & E for federal income tax purposes, yet elect to capitalize and amortize the same expenditures for California tax purposes? [FTB Notice 92-6]

Question 13 – R&E book-tax differences List possible book-tax differences that a corporation could have with respect to R & E expenditures.  If use Section 174(b) for tax  Section 280C(c) adjustment  What is R&D? FAS 2 – doesn’t include, for example, costs to obtain patent, while Section 174 does  Software development – FAS 86 technological feasibility may not be met same time that taxpayer stops having §174 expenses