¶ 6216.When are expenses deductible under the accrual..., 33A Am. Jur. 2d...

33A Am. Jur. 2d Federal Taxation ¶ 6216

American Jurisprudence, Second Edition | August 2017 Update

Federal Taxation
¶ 6000. Accounting Periods and Methods—Inventories—Installment Sales—Compensation Income and Fringe Benefits—
Deductions
¶ 6200. Accrual Method of Accounting.
Expenses

¶ 6216. When are expenses deductible under the accrual method of accounting—the all-events test.

References
Expenses are deductible under the accrual method in the period in which all events have occurred that determine the fact
of the liability, and the amount of the liability can be determined with reasonable accuracy. 43 This “all-events test” is
not met before economic performance occurs with respect to an item. 44 For when economic performance occurs, see
¶ 6217 et seq.

Absolute certainty of payment isn't a prerequisite to accrual and deduction of a liability. 45

A reasonable estimate of the liability must be accrued for the tax year in which it was incurred. If there's a difference
between the estimate and the amount finally determined, it's added to or deducted from income when the final
determination is made. Where the accrual doesn't involve a current expense, but results in the creation of an asset having
a useful life extending substantially beyond the end of the taxpayer's accounting period, the deduction must be taken as
depreciation, amortization, or similar deduction. 46

Where the filing of medical expense claims with the taxpayer was a condition of the taxpayer's liability under its self-
insured medical plan, the taxpayer couldn't deduct, in its current tax year, an estimate of its obligation to make future
payments for medical care given, but for which claims hadn't been filed. The last event necessary to fix the taxpayer's
liability wasn't the receipt of medical care by covered employees, but the filing of properly documented claim forms. 47
Similarly, the filing of warranty claims was the last event fixing an automobile manufacturer's liability for vehicle
warranty expenses and the manufacturer couldn't deduct an estimate of basic and extended warranty expenses in the
earlier year that the vehicle was sold by the manufacturer to the dealer. 48

But, IRS ruled that where the required submission of a claim form and supporting documents was a ministerial act and a
mere mechanism for requesting payment from the taxpayer, the submission of the claim form and proofs of performance
wasn't an event necessary to fix liability. 49

A manufacturer's contractual liability to pay certain trade promotion rebates to customers became fixed and
determinable in the year that the underlying goods were purchased. The sales agreements established the taxpayer's
liability and provided all information necessary to calculate the amount, and the fact that the customers had to later file
a claim was a mere formality that didn't delay accrual of the liabilities. 50

Quarterly fees paid by a corp. in connection with a revolving credit agreement were deductible as business expenses in
year of payment. The fees were paid on the first business day of each quarter in arrears for the previous quarter, so all
events test was already met. 1

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¶ 6216.When are expenses deductible under the accrual..., 33A Am. Jur. 2d...

IRS has provided a safe harbor that allows accrual method recipients of services to treat economic performance as
occurring ratably with respect to contracts under which the services are provided on a regular basis. So, under the safe
harbor, a taxpayer can ratably expense the cost of regular and routine services as the services are provided under the
contract. IRS also has provided procedures for obtaining IRS's automatic consent to change to this accounting method.
Rev Proc 2015-39 is effective for tax years ending on or after July 30, 2015. 2

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Footnotes
43 I.R.C. § 461(h)(4); Reg. § 1.461-1(a)(2); Dixie Pine Products Co v. Com., (1944, S Ct) 31 AFTR 956,
320 US 516, 88 L Ed 270, 44-1 USTC ¶ 9127; U.S. v. Anderson, P. Chauncey, (1926, S Ct) 5 AFTR
131, 5674, 269 US 422, 70 L Ed 347, 1 USTC ¶ 155.
44 I.R.C. § 461(h)(1).
45 Southwestern States Marketing Corp In re, (1994, Bktcy Ct TX) 1994 WL 762192, 9 Tex Bankr Ct
Rep 83, affd (1994, DC TX) 75 AFTR 2d 95-301, 179 BR 813, 95-1 USTC ¶ 50057, affd without op
sub nom Walter Kellogg v. U.S., (1996, CA5) 77 AFTR 2d 96-1348, 82 F3d 413, 96-1 USTC ¶ 50165
(unpublished).
46 Reg. § 1.461-1(a)(2).
47 General Dynamics Corp v. U.S., (1984, Cl Ct) 54 AFTR 2d 84-5989, 84-2 USTC ¶ 9783, 6 Cl Ct 250,
affd (1985, CA Fed Cir) 56 AFTR 2d 85-5858, 773 F2d 1224, 6 EBC 2388, 85-2 USTC ¶ 9688, revd
(1987, S Ct) 59 AFTR 2d 87-899, 481 US 239, 95 L Ed 2d 226, 8 EBC 1489, 87-1 USTC ¶ 9280.
48 Chrysler Corp (f/k/a Chrysler Holding Corp), (2000) TC Memo 2000-283, RIA TC Memo ¶ 2000-283,
80 CCH TCM 334.
49 Rev. Rul. 98-39, 1998-2 CB 198.
50 Ltr. Rul. 201223015.
1 Ltr. Rul. 200514020.
2 Rev. Proc. 2015-39, 2015-33 IRB.

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