Challenged Accounting Method Upheld: ‘Continuing Life Communities’

In normal, taxable earnings is needed to be computed below the technique of accounting applied by a taxpayer in retaining its textbooks, other than as usually required by the Inside Profits Code (IRC or Code) or Treasury laws (IRC §446(a)). Therefore, a taxpayer that consistently applies commonly acknowledged accounting principles (GAAP) in computing its earnings from a business enterprise for purposes of its economical statements ordinarily will use that very same strategy in computing its taxable profits. If, nevertheless, that process “does not evidently replicate income,” the computation of taxable income have to be manufactured less than this kind of process as, in the feeling of the Commissioner, does obviously reflect money (IRC §446(b)).

Continuing Life Communities Thousand Oaks, LLC v. Commissioner (TC Memo 2022-31) considers the scope of the power of the Commissioner to impose a unique accounting system with respect to upfront costs not bundled in earnings at the time of payment. In this circumstance it was undisputed that the petitioner (“Continuing Everyday living,” a confined legal responsibility business categorized as a partnership for tax reasons) used a process permitted by GAAP, but the IRS considered that the approach did not obviously reflect money.