Wilson Wilson, a licensed funeral director, and Forbin Hampton, an unrelated investor, are equal owners of WF

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Question:

Wilson Wilson, a licensed funeral director, and Forbin Hampton, an unrelated investor, are equal owners of WF LLC, which operates a funeral home in New Mexico using the accrual method of accounting. As part of its business, the LLC enters into “future-planning contracts” in which the purchaser of a future-planning contract selects, on a prospective basis, the goods and services to be provided by the LLC at the time of the contract beneficiary's death. For future-planning contracts, Wilson designates the items selected by the purchaser and related charges on a written form, which includes the following payment terms:

If the purchaser pays the balance due on the future-planning contract before death of the contract beneficiary, then the LLC will honor the contract at death as written, without additional cost to the purchaser or contract beneficiary.
If the balance due on the future-planning contract is not paid before death of the contract beneficiary, then the amount due will be recalculated in accordance with the prices in effect at the time of death.

The written form does not contain any express provisions regarding the use or refundability of amounts received by the LLC from the future-planning contracts, but NM state law expressly provides purchasers of future-planning contracts with the right to cancel such contracts at any time. As a result, if requested, Wilson issues a refund, which sometimes includes an interest component based on prevailing interest rates, although very few future-planning contracts have ever been cancelled.

Wilson places the amounts received from the future-planning contracts into an investment account. When the LLC provides the goods and services at the death of a future-planning contract beneficiary, an amount equal to the purchase price of the contract is transferred from the investment account into the LLC’s checking account.

For financial reporting purposes, the LLC records the payments from future-planning contracts as liabilities and does not recognize the payments as income until the tax year in which the goods and services are provided. Each year, the LLC also recognizes interest and dividend income earned on the investment account into which the future-planning contract funds are deposited.

On the LLC’s 2017 income tax return, the LLC excluded $42,244 of payments received in 2017 for future-planning contracts from gross income. Earlier this year, the IRS began an audit of the LLC’s tax return filed for the 2017 year. Wilson has been working with your firm on the IRS audit, and you’ve assisted with the responses to information document requests issued throughout the exam. Last week, Ingrid Examiner, the examining agent, indicated that she was about to close the audit, and you received an email from Wilson that contains the agent’s conclusions (see attachments).

Assignment:

Assume that the LLC would like to challenge the conclusion reached by the agent. Draft a protest letter that will be used by the LLC to document the LLC’s position in the IRS appeals process. The protest letter should be addressed to the IRS Appeals Agent assigned to this case, Andrew Appeals (1111 Constitution Ave NW Washington, DC 20224)