It's Time for Schlude to Go
17 Pages Posted: 27 Sep 2001 Last revised: 12 Jul 2010
In this report, Willis argues that tax law should pay more, not less, deference to accounting principles. This contrasts with opinion offered in an earlier Tax Notes article. He demonstrates that accrual method taxpayers subject to the Schlude requirement of income recognition on receipt suffer: They effectively pay higher taxes than are economically justified. He suggests that the same analysis holds for accrual taxpayers affected by section 461(h), dealing with the economic performance requirement for deductions. While careful planning can reduce these adverse impacts, the author suggests a change in law. One approach, deferral accounting, would solve much of the problem, although not all of it. Ideally, according to Willis, accrual taxpayers should be taxed on the economic substance of the transaction, which involves both deferral accounting plus application of time value of money principles, particularly those dealing with discount loans. But both approaches, he concludes, are far preferable to current law which distinguishes between taxpayers who borrow from their customers as opposed to those who seek capital elsewhere. This artificial distinction, argues Willis, is poor tax policy and results in unnecessary economic distortions.
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