Question

McGraw-Hill's Taxation of Business Entities 2019 Edition,

Problem #83. R.E.M., a calendar-year corporation and Athens, Georgia,
band, recently sold tickets ($20,000,000) for concerts
scheduled in the United States for next year and the
following two years. For financial statement purposes,
R.E.M. will recognize the income from the ticket sales
when it performs the concerts, and R.E.M is obligated to
return the ticket payments should a concert be cancelled.
For tax purposes, R.E.M. uses the accrual method and
would prefer to defer the income from the ticket sales until
after the concerts are performed. This is the first time that
it has sold tickets one or two years in advance. Michael
Stipe has asked your advice. Write a memo to Michael
explaining your findings.

Answer 1

Answer

Chapter 08-Business Income, Deductions, and Accounting Methods sales untl it performs the concerts. This is the first time that it has sold tickets one or two years in advance. Michael Stipe has asked your advice. Write a memo to Michael explaining your findings. MEMO Key Facts: R.E.M., a calendar year corporation, recently sold tickets (S20,000,000) for concerts scheduled in the United States in 2011 and 2012 For financial statement purposes, R.E.M. will recognize the income from the ticket sales when they perform the concerts. For tax purposes, they use the accrual method and would prefer to defer the income from the ticket sales until they perform the concerts. This is the first time that they have sold tickets one or two years in advance Question: Should RE.M. include in current income advance sales of tickets for concerts scheduled in future years? Relevant Authorities: IRC Sections 451 and 446 Rev. Proc. 2004-34, 2004-1 CB 991 Artnell Co v Comm (7 Cir, 1968), 68-2 USTC par. 9593, rev'g and rem'g 48 TC 411 (1967) 84 TCM 394 (2002) Schlude v Comm (S. Ct, 1963), 63-1 USTC par. 9284, aff'g, rev'g and rem'g (8 Cir., 1962), 62-1 USTC par. 9137, aff'g 32 TC 1271 (1959) American Automobile Association v US (S. Ct., 1961), 61-2 USTC par. 9517, aff'g (Ct. Cl., 1960), 60-1 USTC par. 9301 Auto Club of Michigan y Comm. (S. Ct., 1957), 57-1 USTC par. 9593, aff'g (6 Cir., 1956), 56-1 USTC par. 9296, aff'g 20 TC 1033 (1953) Conclusion: There is ample authority to support R.E.M's deferred recognition of the ticket sales income until the amounts are earned (i.e., until the concerts are performed) Thus, the ticket sale income for the concerts wil be recognized in the year of the performance Synopsis: The general rule for prepaid service income is to recognize it in the year of receipt. However, Rev. Proc. 2004-34 allows a one-year deferral for prepaid services. Nonetheless, there is judicial authority (Artnell Co, and Tampa, Bay Devil Rays Ltd.) that indicates that deferring the income until actual erformance more clearly reflects income in this particular setting. The key fact here is that the taxpayer knows exactly when the performance wil take place. If, for example, the prepaid services were for "services on demand" like dance lessons, consulting services, etc., the most advantageous tax treatment would be a one-year deferral under Rev. Proc. 2004-34 8-61