professional tax software tax research
Parker Tax Pro Library
online tax research tax and accountng professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
CPA software
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software tax research


accounting software

CPA tax software

        

 

Cigarette Stamp Tax Not Excludible from Gross Receipts; UNICAP Rules Apply.
(Parker Tax Publishing December 10, 2013)

City Line Candy & Tobacco Corporation, an accrual method taxpayer, is a reseller and licensed wholesale dealer of cigarettes in New York. Under New York law, all cigarettes possessed for sale must bear a stamp issued by the New York tax commissioner. Pursuant to this law, City Line Candy & Tobacco, a licensed cigarette stamping agent for New York, buys cigarette packs for sale, purchases and affixes cigarette tax stamps to those cigarette packs, and sells the stamped cigarette packs to subjobbers and retailers in New York City and throughout New York. Under New York law, City Line Candy & Tobacco is required to include, and did include, the cost of the cigarette tax stamps in the sale price of the cigarettes.

In computing its gross receipts from cigarette sales for financial statement purposes, City Line Candy & Tobacco totaled the gross sale prices of the cigarettes sold during each year. However, for income tax reporting purposes, City Line Candy & Tobacco adjusted its gross receipts from cigarette sales by subtracting the approximate cost of cigarette tax stamps purchased during the fiscal year and reporting as its gross receipts the resulting net amount. City Line Candy & Tobacco argued that its average annual gross receipts (determined for income tax reporting purposes) for the three-tax-year period ending with the tax year preceding each of the years in issue did not exceed $10 million. Thus, City Line Candy & Tobacco argued that it qualified for the small reseller exception under Code Sec. 263A(b)(2)(B) for each of the years in issue and consequently was not required to comply with the uniform capitalization (UNICAP) rules of Code Sec. 263A with respect to the cigarettes it acquired for resale.

In a notice of deficiency, the IRS determined that City Line Candy & Tobacco had underreported its gross receipts for its each of its 2004 through 2006 fiscal years in an amount approximately equal to the cost of the cigarette tax stamps purchased during that tax year. Consequently, the IRS determined that City Line Candy & Tobacco had additional gross receipts of almost $6 million, $5 million, and $5 million for 2004, 2005, and 2006, respectively. As a result of the adjustments to City Line Candy & Tobacco's gross receipts, the IRS also determined that the company's average annual gross receipts for the three-taxable year period ending with the tax year preceding each of the 2004-06 tax years exceeded $10 million; therefore the company was subject to the UNICAP rules of Code Sec. 263A. Under the UNICAP rules, City Line Candy & Tobacco was required to include a portion of certain direct and indirect costs in inventory costs. The IRS classified the cigarette tax stamp costs as general and administrative costs and determined City Line Candy & Tobacco's costs for handling and storage, purchasing, general and administrative, and indirect costs.

Using the simplified resale method without historic absorption (simplified resale method), the IRS determined that City Line Candy & Tobacco had additional Code Sec. 263A capitalizable costs for 2004, 2005, and 2006 of approximately $6,000, $4,000, and $6,000, respectively. The IRS calculated the additional Code Sec. 263A capitalizable costs as the product of the combined absorption ratio and City Line Candy & Tobacco's purported Code Sec. 471 costs at the end of the year.

The IRS also determined that City Line Candy & Tobacco had to increase its inventory costs for 2004, 2005, and 2006 by approximately $252,000, $191,000, and $246,000, respectively. The IRS arrived at these additional amounts by adding the additional Code Sec. 263A costs for each year and City Line Candy & Tobacco's purported Code Sec. 471 costs for each year. The IRS then added the amount of the increase to the company's ending inventory to calculate its adjusted ending inventory for each of the tax years in issue.

The Tax Court held that the IRS correctly determined City Line Candy & Tobacco's gross receipts on the basis of the entire sale price of the cigarettes it sold, including that part of the sale price attributable to the cost of the cigarette tax stamps. As a result, the court said that City Line Candy & Tobacco is subject to the UNICAP rules of Code Sec. 263A because it failed to prove that its average annual gross receipts for the three-taxable-year period ending with the tax year preceding each of the years in issue, correctly calculated to include the entire sale price of the cigarettes it sold, did not exceed $10 million for any of those years. The court also concluded that the cigarette tax stamp costs were indirect costs that had to be capitalized under the UNICAP rules and such costs are handling costs that the IRS properly allocated, in part, to City Line Candy & Tobacco's ending inventory using the simplified resale method.

For a discussion of the uniform capitalization rules, see Parker Tax ¶242,380. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com


Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

    ®2012-2017 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance