Discussion:Merchant Reserves
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Discussion Forum Index --> Advanced Tax Questions --> Merchant Reserves
Discussion Forum Index --> Tax Questions --> Merchant Reserves
| 29 August 2009 | |
| I have a client that sells product online and as a matter of customary practice, the merchant bank withholds a significant percentage of the sales proceeds in an escrow account for refunds and/or charge-backs. The client is a cash basis taxpayer for tax purposes and has treated these merchant reserve accounts as receivables. It is my understanding that they may be required to report these amounts as income under the economic benefit doctrine, since the monies are set aside for the taxpayer in a separate account. Of course, they are protected from the purchaser's creditors. I guess if the merchant bank went bankrupt, the creditors could seize these assets, but I think the FDIC would replace the funds lost. It seems the merchant reserve accounts would not rise to the level of constructive receipt or the claim of right doctrine, since the taxpayer has no control of the monies set aside. Should the merchant reserve funds be included in income under the economic benefit doctrine and if so, can a reduction in value be placed on the value of these funds for the fact that a significant portion of the funds will most likely be returned to the customer as charge backs? I think under the economic benefit doctrine, only the fair market value of the account is included in income. Any thoughts? | |
