13 Nov

The Galedrige Case and Taxation of Building Contractors

In the 1990’s the IRS began to challenge the way that construction companies and building contractors accounted for their income.  Historically, these businesses could use the cash method of accounting and only report income when actually paid by the customer.  The IRS sought to force these companies to change to the accrual method (reporting income when work was done), which would result in a huge tax bill for companies in the year they were forced to change. By the late 1990’s the IRS had already won two major cases on this issue, but in Galedrige v. Commissioner, 73 TCM (CCH) 2838, we convinced the court that the IRS was misinterpreting the statutes, and the company could continue to use the cash method.  Eventually, after several cases followed the Galedrige case, the IRS abandoned its attempts to force these companies to change, and announced this abandonment in Chief Counsel Announcement CC-2001-010 (Feb. 9, 2010).  As a sidelight, we were also able to convince the Tax Court that the IRS had improperly imposed penalties on Galedrige, and the Tax Court ordered the IRS to pay a part of the client’s attorneys’ fees.