In Year 1, T (a cash method taxpayer) performs services for A worth $10,000, which A agrees to pay in Year 2. As part of the transaction, T arranges for A to loan him $10,000 in Year 1, which T will repay in Year 2. In Year 2, A pays T the $10,000 owed for T’s services, and T repays A the loan from Year 1. a. T will not be required to recognize income until Year 2, when A pays him. b. The tax law will disregard the loan in Year 1 as a sham. c. T will be required to recognize income in Year 1. d. Both (b) and (c) are correct.
In Year 1, T (a cash method taxpayer) performs services for A worth $10,000, which A agrees to pay in Year 2. As part of the transaction, T arranges for A to loan him $10,000 in Year 1, which T will repay in Year 2. In Year 2, A pays T the $10,000 owed for T’s services, and T repays A the loan from Year 1. a. T will not be required to recognize income until Year 2, when A pays him. b. The tax law will disregard the loan in Year 1 as a sham. c. T will be required to recognize income in Year 1. d. Both (b) and (c) are correct.
Chapter5: Introduction To Business Expenses
Section: Chapter Questions
Problem 80IIP
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Question
In Year 1, T (a cash method taxpayer) performs services for A worth $10,000, which A
agrees to pay in Year 2. As part of the transaction, T arranges for A to loan him
$10,000 in Year 1, which T will repay in Year 2. In Year 2, A pays T the $10,000 owed
for T’s services, and T repays A the loan from Year 1.
a. T will not be required to recognize income until Year 2, when A pays him.
b. The tax law will disregard the loan in Year 1 as a sham.
c. T will be required to recognize income in Year 1.
d. Both (b) and (c) are correct.
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