Question

1. In each of the following situations explain (1) what doctrine might cause problems for the taxpayer’s planned strategy AND if the strategy would be effective. Your response may be to point out what concerns you have if the answer is not yes or no.

At the end of 2019 Karla learns that tax rates will drop in 2020. Karla billed a client on December 18, 2019, and the client usually makes an electronic deposit to Karla’s account at the end of the month. Karla calls the client and asks that the transfer not be made until January 2020 so she can defer the income to after the new tax law is effective.

Answer 1

The tax is payable on the income which is accrued or received whichever is earlier.

In the given case, Karla has already billed the client. So, the income has already been accrued for the year 2020. Even though such income is not received in the year 2020, the tax shall be payable as it is already accrued (being earlier).

Hence, the taxpayer's planned strategy is not effective. Further, such strategy may intorducee additional risks such as-

1. Delay in receipt of money which results in loss of earning opportunity.

2. Risk of customer going bankrupt or inability to pay the dues.