Critical Thinking

To: ---

From: ---

Subject: Critical Thinking Writing Assignment

Date: November 30, 2010

Case Overview

The two cases involved a company named Koch that has marketed a higher quality polymer asphalt. In 1998, the company took a job in expanding the New Mexico roadway SR 44, which was a very large job. The company had been using the percentage-of-completion method to report income throughout its work on the highway. This method allows the company to spread income received throughout the time the project takes to be completed, instead of recognizing all the revenue at once. The IRS allows a firm to do this under IRC Section 460, for projects not expected to be completed in the taxable year in which the project has started.

The underlying question in each case was: Should the highway project be treated as a long term project compliant with IRC Sec. 460, or should it instead be treated as a warranty contract and recognize all revenues upon receipt?

The US Court of Appeals eventually ruled for a summary judgment in favor of the defendant (the US government) and ruled against the use of percentage-of-completion method. The district court, however, had an original judgment that ruled in favor of Koch, stating that the project was indeed a long term contract and could be treated as percentage-of-completion. Overall, the judgment reached by the district court was written more clearly and was more persuasive.

US Court of Appeals

The judgment reached by the US Court of Appeals ruled in favor of the defendant, and stated that Koch’s contract should be treated as a warranty. It started off its analysis by giving an overview of how to interpret IRS Codes. It said that when an ambiguity occurs, any interpretation that stems close to the original statute is preferred.

The decision then discusses how income is generally treated. It describes how revenue must be recorded for tax purposes upon receipt unless an exception is available....