Bosamia v. COMMISSIONER OF INTERNAL REVENUE
661 F.3d 250
5th Cir.2011Background
- Petitioners Ramesh and Pragati Bosamia own two related Subchapter S corporations, India Music and HRI, with related-party payments at issue under § 267(a)(2).
- From 1998–2004 India Music, accrual taxpayer, deducted yearly increases in accounts payable to HRI; HRI, cash taxpayer, did not include those payments until received.
- India Music deducted $877,579 in accounts payable to HRI during 1998–2003 without actual payment; HRI did not report those amounts as income.
- In 2008 the Commissioner issued a deficiency notice for 2004 disallowing India Music’s 2004 account payable deduction and upwardly adjusting 2004 income by $877,581 to recapture open-year deductions.
- Statute of limitations barred deficiencies for 1998–2002; the Commissioner argued § 481 adjustments were necessary to prevent omission of income due to the change in accounting method.
- Tax Court upheld, concluding that a § 267(a)(2) disallowance constitutes a § 481 change in accounting method, triggering an upward adjustment and resulting deficiency and penalties for 2004.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does §267(a)(2) disallowance change accounting method | Bosamia: no §481 change; audit adjustment only | Commissioner: yes §481 change; postpones deduction timing | Yes; §267(a)(2) disallowance changes method of accounting |
| Whether §481 adjustments apply to open years | Bosamia: limitations bar open-year adjustment | Commissioner: §481 necessary to prevent omission due to change | §481 adjustments valid to reflect open-year impact of the 2004 change |
| Relation to related-party timing and material item | Bosamia: timing change not a material item treatment change | Commissioner: accounts payable timing is a material item | Yes; timing of deduction is a material item under §1.446-1 and §481 |
Key Cases Cited
- Graff Chevrolet Co. v. Campbell, 343 F.2d 568 (5th Cir. 1965) (§481 adjustments necessary to prevent duplication or omission)
- Arnwine v. Comm'r, 696 F.2d 1102 (5th Cir. 1983) (cash-basis timing of income inclusion)
- Huffman v. Comm'r, 518 F.3d 357 (6th Cir. 2008) (definition of changes in method under §446-1)
- Arevalo v. Comm'r, 469 F.3d 436 (5th Cir. 2006) (de novo review of statutory interpretation)
- Nail v. Martinez, 391 F.3d 678 (5th Cir. 2004) (pass-through income context for related-party transactions)