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Critical Thinking Essay

1172 words - 5 pages

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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 ...view middle of the document...

IRC Sec. 460 is such an exception, but should be “construed strictly”, meaning that it should not be very easy to meet this exception. The judgment goes on to state that performances under warranties are not treated as long term contracts and do not fall under IRC Sec. 460.

In order for a contract to be considered long term, the manufacture, building, or construction of property must be necessary for the taxpayer’s contractual obligation to be fulfilled. According to the court, Koch did not have the obligation to construct the road. Although the company would almost certainly perform the work, it was not required to. Therefore, the contract was not considered to be long term by the US Court of Appeals.

US District Court

The judgment reached by the US District Court ruled in favor of the plaintiff, and stated that Koch’s contract should be treated as a long term contract. The analysis of this judgment started off by describing the nature of IRC Sec. 460, and moving to the fact that it was undeniable that Koch would have future, uncertain expenses.

The argument of the defendant, the US government, was that Koch was not the general contractor. Therefore, the work was actually performed by other companies. The IRS had interpreted this in the past, and had ruled that the services done by Koch fall under those of a general contractor. Specifically, Koch was responsible for the final product and bears the entire risk of the construction, even if its revenues do not outweigh the costs.

The court then turned to the notion that the contracts were called warranties. Although the contracts had this name, and warranties are not allowed to use percentage-of-completion, the court ruled that Koch’s warranties did not bear a resemblance to “warranties” as described in the IRC. Koch would certainly have obligations, and the label of “warranty” is irrelevant. Therefore, the contract was allowed to be accounted for using the percentage-of-completion method by the US District Court.

Critical Thinking Analysis

US Court of Appeals

The decision made by the US Court of Appeals was based heavily on logos. Specifically, the decision relied on secondary sources of evidence: past court cases. The court used past court rulings to decide on how deferral propositions should be treated, citing four different cases saying that provisions for tax exemptions should be strictly enforced. These cases helped build the decision’s logical argument, which in...

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