Federal Income Taxation SPRB12 - Sec B
Professor James Shimko
Tax File Memorandum
Nino Giorgobiani
May 16, 2012

May 14th, 2011
Tax File Memorandum
From Nino Giorgobiani
Subject Peaceful Pastures Funeral Home, Inc. Taxpayer Engagement

Today I met with Peaceful to discuss the IRS audit notice they received in regards to their reported income. They want to know whether the amounts prepaid under Peaceful’s program constitutes prepaid income that must be included in Peaceful’s income in the year in which it was received.
Facts Peaceful is an accrual basis taxpayer; they provide a full line of funeral services and sell related goods as well. Over the years their cost of goods sold increased and customers have not been able to afford their services. For this reason, they came up with an approach where customers are able to prepay for their funeral goods and services. Under the contract, the payments are refundable any time until the goods and services are provided to them. Peaceful does not report payments received in advance as income until the year in which the services are provided.
Issue Should the prepaid income be included in the year in which it was received or in the year when the services are provided Conclusion Peaceful should not have to report prepaid income in the year received, they should report income when the services are provided.
Analysis According to Comm. v. Indianapolis Power and Co & Light Co., (65 AFTR 2d 90-394) the opinion was delivered that stated that the main purpose of prepayments was to serve as security rather than prepayment of income. According to commissioner “The key is whether the taxpayer has some guarantee that he will be allowed to keep the money.” Based on a very similar case Perry Funeral Home, Inc. v. Commissioner, TC Memo 2003-340 , Code Sec (s) 451 amounts constituting advance payments for goods and