A professional medical corporation specializing in oncology and hematology maintained a two-week supply of chemotherapy drugs on its premises. Nurses administered the drugs, but a physician was always on site to respond to emergencies. The drugs could not be self-administered and patients could select neither the type or the quantity of drugs for treatments. Under state law, only a doctor could prescribe these drugs and only a licensed pharmacist could sell them.
The IRS challenged the corporation’s use of the cash basis of accounting. The service forced it to inventory the drugs and to include the related accounts receivable in income.
The corporation argued it was not selling the drugs but providing medical services for which the cash basis of accounting was allowed. The taxpayer believed the administration of the drugs was an integral part of the service provided.
The Tax Court sided with the taxpayer and held that the drugs were not “merchandise” under regulations section 1.471-1, and, therefore, the taxpayer properly used the cash method of accounting to deduct the drugs currently as supplies. ( Osteopathic Medical Oncology and Hematology, PC v. Commissioner, 113 TC no. 26, 11-22-99.)
Service Gives Heads Up on Tax Shelters
The IRS announced in Notice 99-59 (1999-52 IRB) that it was going after another “tax product” designed to generate tax losses. The service described a bond and options sales strategy involving a partnership and a foreign corporation, which generated a loss but lacked economic substance. According to the IRS, taxpayers using these shelters claimed artificial losses for capital outlays that they had in fact recovered.
The IRS warned that such losses would not be allowed for tax purposes. The service intends to impose penalties not only on taxpayers that participate in such schemes but also on individuals who promote or report them on tax returns.
No Depreciation for Demos
A large furniture maker displayed in several of its showrooms units it manufactured. The company claimed it generally did not sell the displays to the public unless they were damaged or discontinued. The company also claimed its furniture sometimes remained on the showroom floor for up to 10 years. Consequently, the furniture maker had been depreciating the displayed furniture, using a five-year life for the products.
An IRS examiner disagreed with the company, stating the furniture pieces were displayed on the showroom floor for a much shorter period and were in excellent condition when sold. Moreover, in field service advice 199949031, the IRS determined that displayed furniture was inventory and could not be depreciated.
The IRS concluded that the manufacturer sold the furniture to the public in the ordinary course of business. It said, however, that if the furniture maker could prove any of the furniture had been on display for 10 years, it would consider allowing the company to take a depreciation deduction for those units.
—Michael Lynch, CPA, Esq., professor of tax accounting at Bryant College, Smithfield, Rhode Island.