Federal income tax.
Tax Facts Q: 437. When does a cash basis taxpayer "receive" income? what is the doctrine of constructive receipt?
1RS CCA 201151022
The IRS recently discussed the timing for accounting and tax purposes for agreements known as Multiple Deliverable Contracts (MDC). Typically under these agreements, goods and services are provided at different points in time and over different time periods. Generally, the provider will receive some advance payment for these goods and services. Moreover, companies, for financial statement purposes, will defer the advance payments until the MDC is fully complete (i.e., until all goods and services are provided). For federal income tax purposes the income is deferred under Rev. Proc. 2004-34.
FASB has issued new standards, Accounting Standards Update (ASU> 2009-13 and ASU 2009-14, effective for fiscal years beginning on or after June 15, 2010, for income recognition from MDCs. Previously, if a separate deliverable was not subject to valuation under certain exceptions, income from delivered and undelivered elements was combined into one unit of accounting. Income attributable to that unit was deferred and recognized as die undelivered elements were delivered. Although the actual deferral period varied depending on the products making up the MDC, for financial purposes income could be deferred until all items were delivered under a given MDC.
For its fiscal year beginning January 1, 2011, a taxpayer adopts ASU 2009-13 and ASU 2009-14 for financial statement purposes. The taxpayer wants to use this new financial statement method in determining the extent to which advance payments are included in gross income under Rev. Proc. 2004-34. All items of income deferred under the taxpayer's present method of accounting under Rev. Proc. 2004-34 will continue to be deferred pursuant to that procedure under the taxpayer's proposed method.
The question was recently presented to the 1RS whether the application of FASB standards requires consent of the Commissioner as a change in method of accounting.
As a general matter, the IRC generally requires that a taxpayer who changes the method of accounting for the basis on which it regularly keeps its books must, before computing taxable income under the new method, secure the consent of the Commissioner. [IRC Section 446(e)]. Moreover, Regulations Section 1.446-l(e)(2)(i) similarly provides that a taxpayer that changes its book method of accounting must secure the Commissioner's consent before applying its new book method of accounting for tax purposes.
Accordingly, a taxpayer that previously elected to defer advance payments under Rev. Proc. 2004-34 is required to obtain consent under Section 446(e) if the taxpayer adopts ASU 2009-13 or ASU 2009-14 and wants to use this new financial statement method in determining the extent to which advance payments are included in gross income under Rev. Proc. 2004-34.
Nevertheless, as a general matter taxpayers can obtain consent to use the new book method in determining the extent to which advance payments are included in gross income under Rev. Proc. 2004-34 by following the automatic consent procedures of Rev. Proc. 2011-14.