Related Party Transactions. Sally is an attorney who
computes her taxable income using the cash method of accounting. Sage
Corporation, owned 40% by Sally’s brother, 40 % by her cousin, and 20% by her
grandmother, uses the accrual method of accounting. Sally is a calendar-year
taxpayer, whereas Sage Corporation’s fiscal year ends on January 31. During
2019, Sally does some consulting work for Sage Corporation for a fee of
$10,000. The work is completed on December 15 and Sage receives Sally’s invoice
on that date. For each of the following assumptions, answer the following
questions: During which tax year must Sally report the income? During which tax
year must Sage Corporation deduct the expense?
a. The payment to Sally is made on December 27, 2019.
b. The payment to Sally is made on January 12, 2020.
c. The payment to Sally is made on February 3, 2020.
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