Tax Court In Brief | Continuing Life Communities Thousand Oaks LLC v. Comm'r | IRS Discretion To Change Methods Of Accounting And Abuse Of Discretion

Published date11 April 2022
Subject MatterAccounting and Audit, Tax, Accounting Standards, Income Tax
Law FirmFreeman Law
AuthorFreeman Law

The Tax Court in Brief - April 4th- April 8th, 2022

Freeman Law's "The Tax Court in Brief" covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

Tax Litigation: The Week of April 4th, 2022, through April 8th, 2022

  • Middleton v. Comm'r, T.C. Memo 2022-28 | April 4, 2022?|Kerrigan, J. | Dkt. No 8158-19L
  • Scholz v. Comm'r, T.C. Summary Opinion 2022-5 |April 4, 2022?|Panuthos, J. | Dkt. No 20743-19S
  • Webert v. Comm'r, T.C. Memo. 2022-32 | April 7, 2022 | Gustafson, J. | Dkt. No 15981-17
  • Salter v. Comm'r, T.C. Memo. 2022-9 |April 5 2022?|Lauber, J. | Dkt. No. 10776-20
  • Norberg v. Comm'r, | April 5, 2022?| Lauber, A. | Dkt. No. 12638-20L
  • Metz v. Comm'r, T.C. Memo. 2022-33 | April 7, 2022 | Weiler, J. | Dkt. No. 16784-19

Continuing Life Communities Thousand Oaks LLC v. Comm'r, T.C. Memo. 2022-31 |April 6, 2022?|Holmes, J. | Dkt. No. 4806-15

"One way to think about tax law is to view it as a series of general rules qualified by exceptions, and exceptions to those exceptions, and exceptions to those exceptions to those exceptions. This may be a helpful way to begin to think about the tax-accounting issue we have to analyze in this case." -Holmes, J., Continuing Life at pg. 14.

Short Summary: The Tax Court addresses how a company that owns and operates a continuing-care community should account for upfront payments made by its residents when calculating taxable income. Continuing Life was based in California and was thus subject to specific state laws that required (1) the provision of care to an elderly resident for the duration of his or her life and (2) GAAP accounting. Continuing Life charged three fees: the Contribution Amount, the Deferred Fee, and monthly fees for operations expenses. The Contribution Amount ranged from $245,000 to $570,000 and was paid in trust to a third-party intermediary. The trustee was required to repay a resident's Contribution Amount when the resident agreement terminated by the resident's death, voluntary departure, or expulsion.

The Deferred Fee was a percentage of the Contribution Amount, ranging from 5% to 25%, depending on when the resident's agreement terminated (e.g., 5% for termination 91 days to 1 year; 25% for termination after 4 years). The Deferred Fee was paid only when a resident dies or moves out (not for expulsion) and a new resident buys the unit and pays his or her own Contribution Amount. Continuing Life amortized and recognized as income a fraction of the Deferred Fees by using the straight-line method and the actuarially determined estimated life of each resident. When the resident moved or died, Continuing Life would recognize the remaining unamortized Deferred Fee as income. And, Continuing Life recognized the nonrefundable amount as income before it resold the departed resident's residence. Because the estimated life of each resident was actuarially determined on a year-by-year basis, the method of accounting required yearly modifications to each resident's estimated life expectancy. And...

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