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While petitioners consistently maintain that these receipts and
expenses should have no net effect on the Dealerships' taxable
income, they advance alternative arguments concerning when the
individual items should be taken into account. Prior to trial
they took the position, inter alia, that the expenses were
currently deductible. On brief they contend that both Premiums
and Fees are "period expenses" that should be capitalized and
amortized over the VSC term, and that the portions of the
contract price corresponding to these expenses should accordingly
be included in gross income ratably over the contract term as
well.
Respondent determined that the Dealerships' method of
accounting for these expenses and the corresponding receipts
improperly accelerated deductions or deferred income, resulting
in a distortion of the Dealerships' income.10 We agree.
However, we conclude that some of these deductions may be taken
earlier than respondent has allowed.
a. Timing of Deductions
Under the accrual method of accounting, a liability is
incurred and generally taken into account for the taxable year in
which all events have occurred that establish the fact of the
10 Respondent does not challenge the Dealerships' treatment
of the Commissions that they paid out of VSC sale proceeds.
Respondent concedes that the Commissions were a currently
deductible expense.
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