Memo of Understanding

[BHoffman]

Client was paid by an outside salesman via a Memo of Understanding to have sole rights to sell his product in certain cities. The Memo specified that the term was for one year, and states that the amount paid to the Client is not expected to be refunded under any condition.

I am 99.9% sure this amount is income to the Client.

Client wants to argue that it is a "loan" and any commissions paid to the salesman should be debited against the "loan" amount.

I disagree completely and doubt there will be any commissions. I suspect the salesman works independently for Client's larger competitors, who probably paid the Memo Money via the salesman to shut him out of their market.

Does anyone have thoughts or experience with this kind of arrangement? I guess I'm looking to eradicate that .01% of doubt.

[Snaggletooth]

Thoughts

1. A memo of understanding (MOU) is a poorly enforceable document, but may serve as intent in absence of any other documents.
2. Are the payments subject to substantial refund possibilities under "accrual accounting"? If not, I believe your client has income under the "constructive receipt" doctrine of taxation.
3. Have services been performed? If not, revenue may be deferred if client has accrual system of accounting, and payments shown as "Advances from Customers", "Deferred Revenue", or some sort.

[BHoffman]

1. A memo of understanding (MOU) is a poorly enforceable document, but may serve as intent in absence of any other documents.
2. Are the payments subject to substantial refund possibilities under "accrual accounting"? If not, I believe your client has income under the "constructive receipt" doctrine of taxation.
3. Have services been performed? If not, revenue may be deferred if client has accrual system of accounting, and payments shown as "Advances from Customers", "Deferred Revenue", or some sort.

Hi Snags,

Client is cash basis, and cash was received.

There are no performance requirements other than my Client agrees to give complete control over sales in those cities to the salesman.

I think if Client "fires" the salesman and refunds the money, then it would be an expense. But for now, I believe the amount he received is income.

[Burke]

Client wants to argue that it is a "loan" and any commissions paid to the salesman should be debited against the "loan" amount.

It cannot be construed as a loan as the agreement specifically precludes repayment, so it is definitely income. However, he should be able to deduct any commissions paid to the salesman as bus expenses.

[Snaggletooth]

Income

The client's Cash Basis precludes any possibility that the money received could be anything other than income.

[BHoffman]

Yep. I totally agree. The cash received was definitely not a loan or a contingency.

Thanks to all for advice and opinions