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With respect to the first requirement of the all events
test, the accrual of an item of expense is improper where the
liability for such item is contingent upon the occurrence of a
future event.6 See Security Flour Mills Co. v. Commissioner, 321
U.S. 281 (1944); Brown v. Helvering, 291 U.S. 193, 200 (1934)
(except as otherwise specifically provided by statute, a
liability does not accrue as long as it remains contingent);
Putoma Corp. v. Commissioner, supra at 739.
Paragraph 6 of the Marketing agreement requires petitioner
to "pay MMC a royalty fee of 10 (ten) percent of RESTORE's net
sales." The agreement between petitioner and Matrix, as written,
does not reveal any contingency upon which the parties appear to
have conditioned petitioner's liability. However, respondent
argues that it was Matrix's and petitioner's intention that the
payment of the royalties be contingent on reaching an unspecified
level of profits.
On April 12 and 13, 1984, the shareholders of Matrix had
their first annual meeting. The report of the shareholder
meeting states:
Although until that date [August 1985] MMC is
expected to have earned over U.S. $2 million from
RESTORE INC. in royalties, we have agreed to
retain such royalties within RESTORE as
6Respondent does not contend that the accrued royalties
could not be determined with reasonable accuracy. Moreover, the
amounts accrued are ascertainable by the formula agreed to in the
Marketing agreement.
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