Publication 538 - Accounting Periods And Methods (Page 12 of 19) in pdf

in the tax year in which the all-events test

expenses are assigned is the same for tax and

is treated as being owned proportionately

is met.

financial reporting purposes.

by or for its shareholders, partners, or ben-

eficiaries.

4) Either:

2) An individual is treated as owning the

Related Persons

a) The item is not material, or

stock owned directly or indirectly by or for

the individual’s family (as defined in item

b) Accruing the item in the year in which

Business expenses and interest owed to a re-

(1) under Related persons).

lated person who uses the cash method of ac-

the all-events test is met results in a

counting are not deductible until you make the

better match against income than ac-

3) Any individual owning (other than by ap-

payment and the corresponding amount is in-

cruing the item in the year of economic

plying rule (2)) any stock in a corporation

cludible in the related person’s gross income.

performance.

is treated as owning the stock owned di-

Determine the relationship for this rule as of the

rectly or indirectly by that individual’s part-

end of the tax year for which the expense or

This exception does not apply to workers’ com-

ner.

interest would otherwise be deductible. If a de-

pensation or tort liabilities.

4) To apply rule (1), (2), or (3), stock con-

duction is denied, the rule will continue to apply

Amended return. You may be able to file

structively owned by a person under rule

even if your relationship with the person ends

an amended return and treat a liability as in-

(1) is treated as actually owned by that

before the expense or interest is includible in the

curred under the recurring item exception. You

person. But stock constructively owned by

gross income of that person.

can do so if economic performance for the liabil-

an individual under rule (2) or (3) is not

ity occurs after you file your tax return for the

treated as actually owned by the individual

Related persons. For purposes of this rule,

year, but within 8

months after the close of the

the following persons are related.

for applying either rule (2) or (3) to make

tax year.

another person the constructive owner of

1) Members of a family, including only broth-

that stock.

Recurrence and consistency. To deter-

ers and sisters (either whole or half), hus-

mine whether an item is recurring and consist-

band and wife, ancestors, and lineal

Reallocation of income and deductions.

ently reported, consider the frequency with

descendants.

Where it is necessary to clearly show income or

which the item and similar items are incurred (or

2) Two corporations that are members of the

prevent tax evasion, the IRS can reallocate

expected to be incurred) and how you report

same controlled group as defined in sec-

gross income, deductions, credits, or al-

these items for tax purposes. A new expense or

tion 267(f).

lowances between two or more organizations,

an expense not incurred every year can be

trades, or businesses owned or controlled di-

treated as recurring if it is reasonable to expect

3) The fiduciaries of two different trusts, and

rectly or indirectly by the same interests.

that it will be incurred regularly in the future.

the fiduciary and beneficiary of two differ-

ent trusts, if the same person is the grantor

Materiality. Factors to consider in determin-

of both trusts.

ing the materiality of a recurring item include the

Contested Liability

size of the item (both in absolute terms and in

4) A tax-exempt educational or charitable or-

relation to your income and other expenses) and

If you use an accrual method of accounting and

ganization and a person (if an individual,

the treatment of the item on your financial state-

contest an asserted liability, you can deduct the

including the members of the individual’s

ments.

liability either in the year you pay it (or transfer

family) who directly or indirectly controls

money or other property in satisfaction of it) or in

An item considered material for financial

such an organization.

the year you finally settle the contest. However,

statement purposes is also considered material

5) An individual and a corporation when the

to take the deduction in the year of payment or

for tax purposes. However, in certain situations

individual owns, directly or indirectly, more

transfer, you must meet certain conditions.

an immaterial item for financial accounting pur-

than 50% of the value of the outstanding

poses is treated as material for purposes of

stock of the corporation.

Conditions to be met. You must satisfy each

economic performance.

of the following conditions to take the deduction

6) A fiduciary of a trust and a corporation

Matching expenses with income. To de-

in the year of payment or transfer.

when the trust or the grantor of the trust

termine whether the accrual of an expense in a

owns, directly or indirectly, more than 50%

Liability must be contested. You do not

particular year results in a better match with the

in value of the outstanding stock of the

have to start a suit in a court of law to contest an

income to which it relates, generally accepted

corporation.

asserted liability. However, you must deny its

accounting principles are an important factor.

validity or accuracy by a positive act. A written

7) The grantor and fiduciary, and the fiduciary

Costs directly associated with the revenue of a

protest included with payment of an asserted

and beneficiary, of any trust.

period are properly allocable to that period.

liability is enough to start a contest. Lodging a

For example, a sales commission agree-

8) Any two S corporations if the same per-

protest in accordance with local law is also

ment can require certain payments to be made

sons own more than 50% in value of the

enough to contest an asserted liability for taxes.

in a year subsequent to the year sales income is

outstanding stock of each corporation.

You do not have to deny the validity or accuracy

reported. In this situation, economic perform-

of an asserted liability in writing if you can show

9) An S corporation and a corporation that is

ance for part of the commission expense may

by all the facts and circumstances that you have

not an S corporation if the same persons

not occur until the following year. Nevertheless,

asserted and contested the liability.

own more than 50% in value of the out-

deducting the commission expense in the year

standing stock of each corporation.

Contest must exist. The contest for the as-

the sales income is reported will result in a better

serted liability must exist after the time of the

match of the commission expense with the sales

10) A corporation and a partnership if the

transfer. If you make payment after the contest

income. Also, if sales income is recognized in

same persons own more than 50% in

is settled, you must accrue the liability in the

the year of sale, but the goods are not shipped

value of the outstanding stock of the cor-

year in which the contest is settled.

until the following year, the shipping costs are

poration and more than 50% of the capital

more properly matched to income in the year of

or profits interest in the partnership.

Example. You are a calendar year taxpayer

sale than the year the goods are shipped.

11) A personal service corporation and any

using an accrual method of accounting. You had

Expenses such as insurance or rent are gen-

employee-owner, regardless of the amount

a $500 liability asserted against you in 1999 for

erally allocable to a period of time. If you are a

of stock owned by the employee-owner.

repair work completed that year. You contested

calendar year taxpayer and enter into a

the asserted liability and settled in 2001 for the

12-month insurance contract on July 1 of year 1,

Ownership of stock. To determine whether

full $500. You pay the $500 in January 2002.

allocate half of your expense to year 1 and half

an individual directly or indirectly owns any of

Since you did not make the payment until after

to year 2. Expenses that cannot be practically

the outstanding stock of a corporation, the fol-

the contest was settled, the liability accrues in

associated with income of a particular period,

lowing rules apply.

2001 and you can deduct it only in 2001.

such as advertising costs, should be assigned to

the period the costs are incurred. The matching

1) Stock owned directly or indirectly by or for

Transfer to creditor. You must transfer to

requirement is satisfied if the period to which the

a corporation, partnership, estate, or trust

the creditor or other person enough money or

Page 12

Publication 538 - Accounting Periods And Methods Page 12

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