Question

Larry, Moe, and Curley each received an equal number of shares when they formed theStouges Corporation a

number of years ago. Stooges uses the cash basis of accounting. The

three shareholders are employees. Stouges is a software engineering firm with 57 additional

employees. Gross receipts have grown around 15% per year and are just under $5 Million in

the current year. The 15% growth rate is expected to continue for the next 7 years.

Outstanding accounts receivable are approximately $600,000 at the end of each month. Forty

four employees actively engage in software engineering services (writing specialized programs

from a base software) on a full time basis. The other 16 employees are secretarial and clerical.

Larry read about limitations on using the cash basis of accounting when receipts exceed certain

amounts. He requests information from you on the impact of these rules for their business.

Prepare a memorandum to include the following (facts, issues, law, conclusion):

If the corporation changes to the accrual method of accounting, what adjustments have to

be made?

Would an S election relieve Stouges from having to make a change of accounting method?

Assume changing to an S corporation helps their situation, What other factors should be

considered if Stouges changes from a C corporation to and S corporation?

Use at least the following items in your research:

IRC Secs. 446 and 448

Temp. Reg. Sec. 1.448-1T

H. Rept. No. 99-841, 99th cong., 2d sess., pp. 285-289 (1986)

Larry, Moe, and Curley each received an equal number of shares when they formed theStouges Corporation