- 8 - 'correcting' the 'C' corporation earnings and profits if the figures as of the date of the conversion were inaccurate." Petitioners' contention that retroactive adjustments are necessary if earnings and profits are to perform their intended function would be more persuasive if no other means of correcting inaccuracies in the accrual of long term contract revenue under the percentage of completion method were available. That is not the case, however. The percentage of completion method has a built-in mechanism for correcting mistaken estimates; it differs from the mechanism that petitioners propose. See Herwitz, "Accounting for Long-term Construction Contracts: A Lawyer's Approach", 70 Harv. L. Rev. 449, 465 & n.49 (1957); H. Rept. 99- 426, at 630 (1986), 1986-3 C.B. (Vol. 2) 1, 630. For each year, the cumulative amount of contract revenue that has already been reported in prior years is subtracted from the cumulative amount of contract revenue that is otherwise reportable as of the close of the current year. If in year 1 the taxpayer reports too much revenue and overstates earnings and profits as a result of underestimating the amount of its costs to complete contracts in progress, there will be correspondingly less revenue that remains to be reported for those contracts in succeeding years. The overstatement of earnings and profits in the earlier year may cause shareholders to report a larger amount of any distribution in that year as a dividend. But the lower revenues and higher costs generated in completion of the contracts will reducePage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 Next
Last modified: May 25, 2011