The situation faced by Lance Armstrong illustrates how the field of accounting is not at all boring, despite the contrary opinion of some industry outsiders. In addition to the attraction of Armstrong’s saga as sports news, his condition triggers an interesting tax matter. His case reflects why accountants prepare for challenges helping real people by studying puzzling scenarios in CPA exam material.
The Union Cycliste Internationale (UCI) announced its acceptance of a 1,000-page report published by the U.S. Anti-Doping Agency (USADA) containing allegations that seven-time Tour de France winner Lance Armstrong engaged in the use of performance enhancing drugs. Armstrong has been banned from cycling for life, stripped of his seven Tour titles, and seen the cancellation of endorsement deals that are estimated to reduce his future income by $150 million.
The UCI decision to vacate Armstrong’s Tour de France titles should prompt the attention of anyone studying for the CPA exam. Race organizers and former sponsors are likely to seek recovery of past payments made to Armstrong upon victory in events for which he is no longer the official winner. Total payments from the Tour are estimated at $5 million. Another $12 million of performance bonuses were commitments from sponsors, who purchased insurance contracts to secure the payments.
Legal teams for the Tour and the insurance companies are lining up to obtain refunds for their clients. If those efforts are successful, Armstrong’s accounting team is confronted by some complications. The possibility of Armstrong writing a lot of refund checks next year seems like circumstances fitting for sample CPA exam questions. The issues involved are tax treatment of the repayments and whether Armstrong can get a do-over for amounts he previously declared as income.
The tax accounting procedures outlined in CPA study material clearly allow tax deduction for returning money that was reported as taxable income in prior periods. However, if Armstrong pays out more than his income next year, he receives no immediate tax benefit for the excess outflow. Although he can carry back or carry forward next year’s operating loss, the variation of tax rates in different years could penalize him.
Fortunately, Section 1341 of the Internal Revenue Code permits Armstrong to achieve virtual time travel to past years of differential tax rates. Under this tax accounting device, Armstrong may redetermine his hypothetical reduction in taxes for earlier years as if the repaid amounts were never income. This action substitutes for deducting the repayments in the year paid. The calculated reduction of prior year tax paid is then applied to reduce current year tax liability.
The tax returns of previous years are not actually amended because those periods are closed by statute. Instead, they are simply prepared over again as if the repaid income from those years had never happened. That seems like a perfect exercise for a young accounting associate with which to take CPA exam practice. However, experienced CPAs will need to decide if Armstrong qualifies for Section 1341. Moreover, the complexity of some requirements is likely to necessitate a joint meeting of Armstrong’s accountants and lawyers. He should keep the receipt from paying those experts since that expense is tax deductible.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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