When Is the Accrual Method Available to Taxpayers? The Tax Court in The Morning Star Packing Company Case

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When is the accrual method available to taxpayers?

A recent Tax Court case addresses the accrual method of accounting in the cost-of-goods-sold (COGS) contexts:

The Morning Star Packing Company, L.P., et al. v. Comm’r, T.C. Memo. 2020-142 | October 14, 2020 | Cohen A. | Dkt. Nos. 5013-15, 5015-15, 16684-16, 16842-16

Short SummaryPetitioners sought review of the IRS’ determination that they were not entitled to increase their cost of goods sold (“COGS”) for the costs to restore, rebuild, recondition, and retest their manufacturing facilities for years of 2008 – 2011.  The Tax Court found in favor of the IRS.

Key Issue:  Two key issues: (1) were certain accrued production costs fixed and binding where economic performance did not occur until the year following the tax year claimed for those costs; and (2) did Petitioners’ inclusion of such production costs in COGS for the years in issue result in a more proper match against income than inclusion in the taxable year.

Primary Holdings

Key Points of Law:

InsightThis case highlights the need for an accrual taxpayer to give extra scrutiny to the liabilities that it intends to deduct to ensure that all conditions have been met to claim the deduction.  It further illustrates the need for taxpayers to engage and consult with tax professionals in the preparation of their tax returns.

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Business/Tax Planning