Single Event

My first thought is: income in 2008 (nothing "phantom" about it), and then a NOL carry-back in 2009. However, your scenario raises a few questions, many of which depend on the nature of the "event". Is this taxpayer starting a business as a sole proprietor, which will exist for at least three years? Will there be any inventory? Will the customers be treating their ticket purchases as legitimate business expenses on their part, or personal expenses? Is there sales tax on the ticket purchases? The scope of my imagination does not currently include a realistic situation where I would fork over cash now to a private individual in exchange for the promise of attending (or participating in, or reselling my ticket to) some event two years hence. (Heck, even the Olympics don't sell tickets to the public that far in advance, and they have a long history...) Wouldn't this normally be something a non-profit organization would handle? Or, wouldn't this normally be something that customers would make a nominal deposit for, rather than a full-price purchase, so far in advance?

-Mark Bole

From am purely accounting standpoint, these seem to be deposits, refundable if not earned when the event occurs. This is what's called the matching principal, i.e. matching income and expense. I've not researched it, but am inclined to follow the old dictum that income tax law closely follows income tax law. What say others?

Holiday ChEAr$, Harlan

Yes.

Some, not much (stuff produced to be provided to all members).

Probably half and half

No (they're really memberships in a convention).

Others do.

Usually, yes; most of these are run by non-profits, and are annual events. But a few are run by nonexempt entities.

Nope.

Seth

I agree. It reminds me of the case where a guy embezzled several million dollars around Thanksgiving, and was caught the following January. The bulk of the money was recovered. While he was sitting in jail the embezzler got an assessment notice from the IRS for tax on his stolen millions. When he complained that he didn't get to keep the money, he was told that he'd be allowed the deduction for the following year. Stu

From an accounting perspective, if this is an accrual rather than cash basis entity, and all the work has not been completed or services delivered (i.e., the event presented), then the matching principle would pretty much require that the funds received be booked something like debit cash, credit a liability account (e.g., prepaid income). If there was a refund provision in the sale that stated if said event does not take place, the advance sales amounts would be refunded, then the all events test would not have been met for tax purposes and tax would follow book and therefore, income recognition would be deferred until 2009 in the above facts. In fact, because most of the expenses would actually be paid in 2008, there may even be a loss in 2008 that could be carried forward into 2009 due to the combination of current expenses and deferred income(some expenditures may of course generate pre-paid expense assets). I think I just talked myself into the position the original poster was looking for while writing this response. This seems too favorable to get to so easily. Anyone wish to rebut?

Can an LLC be an accrual basis entity (when the owner is cash basis)? Can an owner get a capital gain by selling property to an LLC? (That could be a major advantage, if he gets long-term capital gain and the LLC expenses or depreciates quickly the property.) Seth

As to the first question, it depends. If the LLC elects to be treated as a corporation for tax purposes, then it may be able to elect the accrual method of accounting; however, if the LLC accepts its default status (i.e., disregarded entity), then the owner's method of accounting will control (because, for tax purposes, it is the owner, not the LLC, earning the income and incurring the expenses). As to the first question, again, if the LLC elects to be treated as a corporation, it may be possible for the owner to get LTCG treatment even though the corporation holds the property for use in its trade or business and takes depreciation. However, the IRS is likely to be very suspicious of this maneuver, and is quite likely to attempt to recharacterize the sale as a disguised contribution (and payments by the LLC as disguised dividends) unless all of the terms are on an arms' length basis, are properly documented, and the terms of the written agreement are, in fact, followed. If the LLC accepts its default status as a disregard, then no, you cannot sell something to yourself and recognize the gain, and that's what you're doing for federal tax purposes if you sell something to your single member LLC - selling to yourself. Keep in mind, however, that the treatment may be different under applicable state law.

From Pub 538: "You can account for business and personal items using different accounting methods. For example, you can determine your business income and expenses under an accrual method, even if you use the cash method to figure personal items."

Again Pub 538: "If you operate two or more separate and distinct businesses, you can use a different accounting method for each. No business is separate and distinct, however, unless a complete and separate set of books and records is maintained for the business. If you use different accounting methods to create or shift profits or losses between businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct." It never occurred to me that one could just check the "accrual method" box on Schedule C for the first year filed, but now I can't see why not (with adequate non-IRS accounting statements, of course).

-Mark Bole