Ticket inventory

All, I hope everyone is well. We have a client who purchases event tickets at wholesale and sells them a retail. He had over 600k in inventory as of 2018. We are thinking about writing it off as COGS because of the new tax laws for companies making less than 25MM a year.

The taxpayer is not required to provide his financials to third parties and be reported in accordance with GAAP. We have not prepared the form 3115 for this accounting change for 2018 for anyone yet. It does make sense for this client.

Does anyone see any issues here, and has anyone prepared the 3115 based on this new 2018 change? We have to do this by Monday 9/16 .

Thank you in advance.

The taxpayer is not required to provide his financials to third parties and be reported in accordance with GAAP.. But that's not all that's included within "applicable financial statement". I vaguely recall something about books and records. Do they keep track of the tix?

Hi Nilo, thank you for the email. They have been keeping it as inventory. They dont need to though, and can report directly to COGS. Thank you.

No, I saw your point. Mine is different. Even if he can operate OK with no accounting for inventory on his books, financials, etc., I'm assuming they need off-books records of what tix they own. Can they remember all the details with no records?

Couple prior posts:

viewtopic.php?f=8&t=15670&hilit=+applicable+financial

viewtopic.php?f=8&t=12901&hilit=+applicable+financial

I don't think we have a final IRS interpretation.

Nilo, understood. They have a third party App, which let's them track their ticket inventory. Similar to how a restaurant uses a point of sale system to track sales and what food is selling, retained, etc.

A whole separate question lurks. Are tickets inventory, i.e., is your client in the business of purchasing and selling merchandise? Or are they in a service business, like, say, a movie theater that sells tickets to see movies? Probably merchandise. Or is he an agent for the provider of the service? Hmm.

Hi Nilo, he purchases and sells merchandise. Like Ticket Master.

The issue I see with this is most companies will track inventory in some way especially when they get close to 25MM. It is obvious. I dont see why a business cannot show the inventory on the balance sheet, and take this deduction and allow the accrual to cash adjustment through an M1, etc. This is similar to someone tracking AR. A lot of businesses will use QuickBooks or some other software to track AR on the balance sheet, and then when it comes tax time, they will have an M1 accrual to cash adjustment or just not show AR at all and report their taxes on a cash basis. Curious to see if you what you think of this view.

Like Ticket Master.. Well, then, here's what TicketMaster's own description says in its 2018 SEC filing. Emphasis is mine. Does not seem to be sale of inventory but rather a service business.

Ticketing. Our Ticketing segment is primarily an agency business that sells tickets for events on behalf of its clients and retains a fee, or service charge, for these services. We sell tickets for our events and also for third-party clients across multiple live event categories, providing ticketing services for leading arenas, stadiums, amphitheaters, music clubs, concert promoters, professional sports franchises and leagues, college sports teams, performing arts venues, museums and theaters. We sell tickets through websites, mobile apps, ticket outlets and telephone call centers. During the year ended December 31, 2018, we sold 52%, 43%, 4% and 1% of primary tickets through these channels, respectively. Our Ticketing segment also manages our online activities including enhancements to our websites and product offerings. Including intersegment revenue, our Ticketing business generated $1.5 billion, or 14.2%, of our total revenue during 2018, which excludes the face value of tickets sold and is net of the fees paid to our ticketing clients. Through all of our ticketing services, we sold 217 million tickets in 2018 on which we were paid fees for our services. In addition, approximately 265 million tickets were sold using our Ticketmaster systems, including through season seat packages, our venue clients’ box offices, and other channels through which we do not receive a fee. Our ticketing sales are impacted by fluctuations in the availability of events for sale to the public, which may vary depending upon event scheduling by our clients. As ticket sales increase, related Ticketing operating income generally increases as well.

We sell tickets on behalf of our clients through our ticketing platforms across the world. We generally enter into written agreements with individual clients to provide primary ticketing services for specified multi-year periods, typically ranging from three to five years. Pursuant to these agreements, clients generally determine and then tell us what tickets will be available for sale, when such tickets will go on sale to the public and what the ticket price will be, sometimes with our guidance and recommendations. Agreements with venue clients in North America and Australia generally grant us exclusive rights to sell tickets for all events presented at the relevant venue for which tickets are made available to the general public. Agreements with promoter clients in other international markets generally grant us the right to an allocation of tickets for events presented by a given promoter at any venue, unless that venue is already covered by an existing exclusive agreement with our ticketing business or another ticketing service provider. Similarly, in such international markets we have venue agreements which provide Ticketmaster an allocation of tickets for all events at those venues. Where we have exclusive venue contracts, clients may not utilize, authorize or promote the services of third-party ticketing companies or technologies while under contract with us. While we generally have the right to sell a substantial portion of our clients’ tickets, venue and promoter clients often sell and distribute a portion of their tickets in-house through their box office and season ticket programs. In addition, under many written agreements between promoters and our clients, and generally subject to Ticketmaster approval, the client may allocate certain tickets for artist, promoter, agent and venue use and not make those tickets available for sale by us. Due to these and other permitted third-party ticket distribution channels, we do not always sell all of our clients’ tickets, even at venues where we are the exclusive primary ticketing service provider, and the amount of tickets that we sell varies from client to client and from event to event, and also varies as to any given client from year to year.
We currently offer ticket resale services, sometimes referred to as secondary ticketing, principally through our integrated inventory platform, league/team platforms and other platforms internationally. We enter into arrangements with the holders of tickets previously distributed by a venue or other source to post those tickets for sale at a purchase price equal to a new sales price, determined by the ticket holder, plus a service fee to the buyer. The seller in this circumstance receives the new sales price less a seller service fee.

It may be surprising, but maintaining inventories on the balance sheet item is not as universal as most think. In my career, I've run across mid-market companies (>$25 million in sales) and large company subsidiaries who either expense inventory entirely or expense everything except raw materials. It's rare, but it happens. To be fair, full expensing usually happens in private companies without debt that focus solely on the bottom line. I've heard that it can happen in lean implementations where everyting is so JIT that inventory is no longer material, but I've never seen one first hand. Moving beyond that, once we dip into the small company realm, where the results under accrual with inventories and under cash with full inventory expensing are often substantially identical, expensing becomes more common. Businesses can get by without inventory on the balance sheet. As to why we need book conformity instead of being able to make a tax-only AJE?

Treasury created the DMSH. The idea appears to have been based on the premise that financial and book accountants would not permit expensing in cases where it would materially distort book income. In other words, accountants would act as the gatekeepers. To their credit, the AICPA did push back against this view, but it is the rule we have. Anyway, the way I have presented this issue since the TPR came out is simple:

If the taxpayer does not have a documented expensing policy; if the taxpayer capitalizes the de minimis items on its books and records and uses those books in managerial decisions, in presenting the results to owners and creditors, and for other purposes; and, if the only place the expensing policy is implemented is in a tax-only AJE after year-end, what evidence is there that a book expensing procedure actually exists? The DMSH is a book-conformity rule, not an expensing election like section 179. It would be a great, taxpayer-friendly answer for it to work with a tax-only AJE or even an M-1. I see no basis to permit that at this time.

About forty years ago, I learned that Marriott Corporation expensed the cost of all their furnishings and furniture. Hundreds or maybe thousands of furnished hotel bedrooms each year. I was impressed.

But that was forty or so years ago. Now I'm watching them build a huge corporate headquarters building here in downtown Bethesda, and I'm wondering what immaterial little de minimis who-cares-anyway kinda costs are just being written off cuz it's so much trouble to track those costs over their depreciable lives...!

If the taxpayer does not have a documented expensing policy; if the taxpayer capitalizes the de minimis items on its books and records and uses those books in managerial decisions, in presenting the results to owners and creditors, and for other purposes; and, if the only place the expensing policy is implemented is in a tax-only AJE after year-end, what evidence is there that a book expensing procedure actually exists? The DMSH is a book-conformity rule, not an expensing election like section 179. It would be a great, taxpayer-friendly answer for it to work with a tax-only AJE or even an M-1. I see no basis to permit that at this time.

That’s not the real world with most of our small business clients. (First of all, you don’t capitalize, or expense, anything on your “records.” Your “records” in the small business world is the invoice the vendor sent. I realize the Reg uses the word “records” here, but it’s kind of stupid to me). In terms of capitalizing on the books…sure, we might have a client that put a $1,400 computer on his self-prepared Balance Sheet (or even twenty $1,400 computers). But then we’ll reverse it to the P&L, such that the “final books” do not reflect capitalization. That is the real world. In other words, our small business clients typically have one set of financial statements…and those are on the tax basis. The accounting procedure is this: Everything the “office manager” does to the books is tentative. The tax AJE made by the external accountant is final (and it isn’t a “tax only” AJE). If we need to document that in writing, fine, but the DMSH rules don’t require it to be in writing for non-AFS taxpayers. So to me, in most cases, the DMSH acts just like Sec 179.

Now, if we have a client that issues a GAAP financial statement, but it is not an AFS, and if the client capitalized the twenty $1,400 computers for GAAP purposes, then that might be viewed as having a “set of books” wherein the DMSH wasn’t followed. Perhaps that could be problematic (although I’m dubious). That might be more of what you’re talking about it, but at our firm, those types of clients wouldn’t be in the majority.

With all of that said, as to OP’s real question, I think the jury’s still out on that – on whether or not we can just expense out our “inventory” under the DMSH.

Jeff, your points are quite apt. After five years, we still don't have clear guidance on the DMSH and footnote 465 exasperates the issue. At this point, I think the Service should issue guidance that says that the book method is the method in the reviewed financials if you have 'em, in the compilation if you don't have reviewed financials, and, if you don't have either, a numerically determined safe harbor with some guidance on the facts and circumstances that would be relevant outside the safe harbor.