Academic journal article Journal of Accountancy

Full Charge on Alternators

Academic journal article Journal of Accountancy

Full Charge on Alternators

Article excerpt

The Tax Court required an auto parts remanufacturer to include in income charges it normally waived in exchange for used parts from its customers. In so ruling, the court underscored that where a taxpayer's accounting method does not clearly reflect income, the government can require it to use a different method.

Jeffrey, Bruce and Donald Bigler owned BBB Industries, an accrual-method S corporation that rebuilt alternators and starters. When the company sold a part, the bill consisted of a unit price and a core price. The customer paid the unit price, plus (rarely) the core amount or (usually) traded for equivalent credit a used part, which BBB would then remanufacture. BBB reported as taxable income the unit price but not the core price, which it accounted for on its balance sheet as a liability or deferred income, depending on when it was credited and the used part received.

Under the accrual method, income is reported when all events have occurred that fix the right to receive the income, and its amount can be determined with reasonable accuracy (the "all-events" test). Generally, it is met on the earliest of the date payment is received, the date payment becomes due, or the date economic performance takes place. The government used its authority under IRC [section] 446(b) to declare that BBB's method of accounting under the all-events test did not clearly reflect income and that the core amount must be reported when and in the amount billed. …

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