James W. and Laura L. Keith - Page 23




                                       - 23 -                                         
          sale in question were income to the taxpayer in the year 1918.”             
          Parish-Watson & Co. v. Commissioner, 2 B.T.A. 851, 860 (1925);              
          see also sec. 15A.453-1(d)(2), Temporary Income Tax Regs., 46               
          Fed. Reg. 10717 (Feb. 4, 1981).  But see sec. 1.1001-1(g), Income           
          Tax Regs., for sales or exchanges occurring on or after August              
          13, 1996.                                                                   
               We additionally point out that, to the extent petitioners              
          argue no income is required to be recognized because the voidable           
          notes evidencing the debt have no fair market value and thus are            
          not the equivalent of cash, this consideration has no place in              
          the analysis of an accrual method entity.  The following                    
          explanation clearly distinguishes between accrual and cash                  
          accounting in this regard:                                                  
               An agreement, oral or written, of some kind is                         
               essential to a sale.  If payment is made at the same                   
               time that the obligation to pay arises under the                       
               agreement, then the profit would be reported at that                   
               time no matter which method was being used.  However,                  
               the situation is different when the contract merely                    
               requires future payments and no notes, mortgages, or                   
               other evidence of indebtedness such as commonly change                 
               hands in commerce, which could be recognized as the                    
               equivalent of cash to some extent, are given and                       
               accepted as a part of the purchase price.  That kind of                
               a simple contract creates accounts payable by the                      
               purchasers and accounts receivable by the sellers which                
               those two taxpayers would accrue if they were using an                 
               accrual method of accounting in reporting their income.                
               But such an agreement to pay the balance of the                        
               purchase price in the future has no tax significance to                
               either purchaser or seller if he is using a cash                       
               system.  [Johnston v. Commissioner, 14 T.C. 560, 565                   
               (1950).]                                                               







Page:  Previous  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  Next

Last modified: May 25, 2011