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result of the accrual of interest payable by petitioner, Matrix
recorded interest receivable from petitioner and a corresponding
amount of income.
Beginning in 1983, petitioner reported a net loss on its
Form 1120, and continued to report losses until the year ending
December 31, 1988. In the years ending December 31, 1989 and
1992, petitioner reported positive taxable income before taking a
deduction for net operating losses from prior years. In 1990,
1991, and 1993 through 1995, petitioner reported net losses.
Petitioner reported no tax due and paid no taxes in all the years
1983 through 1995. Petitioner's accrued royalties and interest
due on the accrued royalties to Matrix as of December 31, 1994,
were $6,186,961 and $1,417,697, respectively. Throughout this
time period, petitioner continued to accrue, deduct, but not pay,
royalties and interest related to the accrued royalties.
OPINION
The first issue we must decide is whether petitioner may
accrue and deduct royalties computed but not yet paid under an
agreement with Matrix. Respondent argues that petitioner is not
entitled to deduct the accrued royalties at issue because
petitioner's liability to pay the accrued royalties was subject
to the contingency that profits must first be realized before
petitioner was to pay the accruals. Petitioner's position is
that it may deduct the accrued royalties because the liability to
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