Reference no: EM131240405

From the e-Activity, evaluate the importance of the principal issue litigated in the case in question using the tax research steps outlined in Appendix A of your text.

Go to the Tax Almanac Website, located athttps://www.taxalmanac.org/index.php/Tax_Research_Resources. Review the U.S. Tax Court - Memorandum Decision case, "Alacare Home Health Services, Inc., Petitioner v. Commissioner of Internal Revenue, Respondent". Be prepared to discuss. Note: The case noted above can be found by navigating to U.S. Tax Court, U.S. Tax Court Decisions, and entering a keyword search in the provided search box.

The tax research steps are as follows:

1. Determine the facts.

2. Identify the issues.

3. Locate applicable authorities.

4. Evaluate these authorities.

5. Analyze the facts in terms of applicable authorities.

6. Communicate conclusions and recommendations to others.

Facts: Alacare Home Health Services, Inc. (Alacare) is a Medicare-certified home health care agency with the principal place of business located in Birmingham, Alabama. Alacare's revenue consists of 98 to 99 percent reimbursement from Medicare. Alacare has used an accrual method of accounting since its incorporation in 1992. Alacare's policy is to expense all capital items that cost less than $500. Alacare's expensing policy meets Medicare guidelines for the capitalization of depreciable assets. Alacare hired Pearlman, Nebben & Associates to prepare its 1995 and 1996 Federal corporate income tax returns. The IRS determined Alacare's expensing policy was not a proper method of accounting and the assets expensed in the 1995 and 1996 tax returns must be capitalized over their useful lives.

Issues: The issues are Alacare's policy to expense all capital items that cost less than $500 and whether or not Alacare is liable for a substantial understatement of revenue penalty under IRC Section 6662.

Applicable Authorities: The applicable authorities used for this case are Internal Revenue Codes Sec. 263(a)(1) and Sec. 446(a); court case Cincinnati, New Orleans & Tex. Pac. Ry. Co. v. United States, 191 Ct. Cl. 572, 424 F.2d. 563, 569 (1970); and Union Pac. R.R. Co. v. United States, 208 Ct. Cl. Cl. 524 F.2d 1343 (1975).

Evaluate Authorities: In both cases, the Court of Claims decided the taxpayer could deduct a de minimis amount of expenses for low-cost capital assets having a useful life greater than 1 year if the accounting method established by the Interstate Commerce Commission clearly reflects income.

Analyze: The Tax Court determined that the facts in both cases were not applicable to Alacare's expensing policy. Alacare hired an accounting firm with healthcare industry experience and relied on Pearlman, Nebben & Associates for professional advice concerning its return information.

Communicate: The Tax Court determined that Alacare's accounting method did not clearly reflect income and the company could not expense the costs of its assets that were less $500 and had a useful life of greater than 1 year. The court also determined that Alacare was not liable for a substantial understatement of revenue penalty.