I need help with this one
Peter is an auto mechanic. On November 25, Year 1, he made some major auto repairs on Harry’s Mercedes. Harry is an attorney. In exchange for the service, Harry is going to draft Peter’s will and represent him when he settles on his new house. Harry will perform all of these services in Year 2. The repair bill for the Mercedes came to $1,200. Both Peter and Harry are cash-basis taxpayers. How do they report this income?
A. Both report $1,200 income in Year 1.
B. Both report $1,200 income in Year 2.
C. Harry reports $1,200 in Year 1 and Peter reports $1,200 in Year 2.
D. Peter reports $1,200 in Year 1 and Harry reports $1,200 in Year 2.
Answer (C) is correct.
Under Sec. 451(a) and Reg. 1.451-1(a), a cash-basis taxpayer generally includes an item in income when it is actually or constructively received. Under Sec. 461(a) and Reg. 1.461-1, a cash-basis taxpayer generally reports income only in the year of actual receipt. Constructive receipt is equivalent to actual receipt. The services performed for Harry were completed in Year 1, and therefore he reports $1,200 of income in Year 1. The services performed for Peter were completed in Year 2, and therefore he reports $1,200 of income in Year 2.
The question states the car was worked on in Year 1 by Pete and Harry will perform services in Year 2, but the answer explanation says the opposite. Can anyone explain this one?
AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)
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