Partial Relief from IRS Dealer Status - Posted by JHyre in Ohio

Posted by bwhite-tn on May 16, 2000 at 20:36:12:

It’s about time the IRS done something construtive.
Thanks for the update, Mr. John

Happy Investing Now


Partial Relief from IRS Dealer Status - Posted by JHyre in Ohio

Posted by JHyre in Ohio on May 16, 2000 at 15:33:00:

Possible Relief for IRS Dealer Status- Comments, Slings and Arrows Welcome

Recently released Revenue Procedure 2000-22 may provide some tax relief to “dealers”. Specifically, Rev. Proc. 2000-22 allows taxpayers with annual gross revenues under $1,000,000 to account for inventories under the cash method of accounting instead of using the accrual method. What in the He!! does that mean?

Well, most of you know that if you sell inventory (are a “dealer” in common parlance) with a basis of $2,000 for a note with a face value of $10,000 and a fair market value of $5,000, you will have $8,000 in gain IMMEDIATELY. This presents a return-killing problem, especially for Lonnie Dealers like me. The root of this rule is the accrual basis of accounting. It requires inclusion in income at face value of the note, regardless of cash-flow or the actual value of the note. And that nasty old accrual method is required for any business where inventory is a “material income-producing factor”. In English, if you sell stuff, even just a little, you gotta use this nasty method to keep your tax books.

Now, an exception to that blatantly unjust rule has been promulgated in the form of Rev. Proc. 2000-22. Taxpayers with annual gross revenues under $1 million can use the cash method of accounting. That method is generally more favorable than accrual method where sales on notes are concerned. To follow the example above: The immediate gain under the cash method would equal $3000- fair market value of the note less basis. The difference between Face Value and Fair Market Value would effectively equal Original Issue Discount (“OID”) and be taxable (more or less) ratably over the life of the note (The OID rules are very complex- I’ll not delve into them here). So if the note pays off on schedule, you’ll pay the same amount of tax as under the accrual method- but you’ll pay that tax a lot later- avoiding cash flow issues and creating present value.

For the skeptics and their attorneys/CPA’s- see: Rev. Proc. 2000-22; COWDEN 289 F.2d 20; SCHARF EST. 38 TC 15; Rev. Rul. 79-292; GCM 37218; CAMPBELL 661 F.2d 210 (Ct. Cl. 1981); HELLER TRUST 382 F.2d 675 (the latter dealt with land-contracts, no less).

You still pay at ordinary rates and installment sales contracts and 1031 are still no-no’s?.but I’ll take what I can get. If you have used accrual method in the past, you must file Form 3115 to change to cash method. Attorney/CPA (I’m the former!) can assist with this and advise on other ramifications of changing to cash method (generally good).

Comments & criticism welcome. Remember, you heard it here first.

John Hyre

Re: Partial Relief from IRS Dealer Status - Posted by Ben in Ohio

Posted by Ben in Ohio on May 17, 2000 at 07:10:04:

Great Post. Thanks for providing a heads up in this very important area. It is an area we like to avoid due to the complex nature of it. Also, I have found it difficult to find CPA’s that actually do the ‘due diligence’ on tax strategies. Thanks!