Kaps Warehouse, Inc. - Page 25

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                  In sum, we hold that petitioner has failed to establish that                        
            the receivables at issue were bad debts pursuant to section 166.                          
                  E.  Petitioner Was Required To Accrue Sales Income When All                         
                  Events Had Occurred That Fixed the Right To Earn the Income                         
                  and the Amount Was Determinable With Reasonable Accuracy                            
                  Petitioner further contends that it should not have to book                         
            each sale as income in the year the sale took place because the                           
            accounts receivable (from the related entities) were uncollectible.                       
            Respondent argues that petitioner was required to accrue the sales                        
            income in the year of sale and that the accounts were collectible.                        
            We agree with respondent.                                                                 
                  The general rule for the taxable years of inclusion of income                       
            appears in section 451.  Section 451(a) requires:                                         
                        The amount of any item of gross income shall                                  
                        be included in the gross income for the                                       
                        taxable year in which received by the                                         
                        taxpayer, unless, under the method of                                         
                        accounting used in computing taxable income,                                  
                        such amount is to be properly accounted for as                                
                        of a different period.                                                        
            Section 1.451-1(a), Income Tax Regs., provides that if the taxpayer                       
            is on the accrual basis, the income must be included in income when                       
            all events have occurred that fix the right to receive such income                        
            and the amount thereof can be determined with reasonable accuracy                         
            (the "all-events test"). Section 446(a) provides: "Taxable income                         
            shall be computed under the method of accounting on the basis of                          
            which the taxpayer regularly computes his income in keeping his                           
            books."  The accrual method of accounting is one permissible method                       

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Last modified: May 25, 2011