Tax Court denies summary judgment in advance payment case


The Tax Court has denied the IRS’s motion for summary judgment in A.C.M.E. v. Commissioner (Docket No. 3327-22) because of a material dispute of fact around the characterization of the prepayment the taxpayer received from its customers as a non-taxable deposit or taxable advance payment.


The taxpayer bringing the case is in the business of manufacturing and selling packaging materials to fruit growers. The fruit growers had the option to prepay for the packaging materials to lock in a lower rate. If the fruit growers did not need packaging materials in subsequent years, they had the option to obtain a refund from the taxpayer or apply the prepayment to packaging materials in the future. The IRS is arguing that this prepayment was an advance payment, included in income in the year the prepayment took place. The taxpayer is arguing that the prepayment is a deposit and therefore includable in income only if the fruit growers used the amount to pay for the packaging materials.


The Tax Court listed various factors that should be weighed to determine the characterization of prepayments, emphasizing the importance of which party controls the conditions under which repayment or refund occurs. In addition, the Tax Court also highlighted control over deposits (i.e., absence of a trust fund), unrestricted use, nonpayment of interest, and later application of the moneys to services. Ultimately, the Tax Court stated that there is a material dispute of fact regarding the true characterization of the payments. Taxpayers should watch for further developments when the final judgment is made because the analysis the Tax Court applies could have implications for many other taxpayers with prepayment issues.



Tax professional standards statement

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.


More tax hot topics