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Anderson, 269 U.S. 422, 441 (1926); sec. 1.461-1(a)(2)(i), Income
Tax Regs.
As the Supreme Court has explained:
It is fundamental to the “all events” test that,
although expenses may be deductible before they have
become due and payable, liability must first be firmly
established. This is consistent with our prior
holdings that a taxpayer may not deduct a liability
that is contingent * * * [United States v. General
Dynamics Corp., 481 U.S. 239, 243 (1987).]
As we have further explained:
The all-events test is based on the existence or
nonexistence of legal rights or obligations at the
close of a particular accounting period, not on the
probability--or even absolute certainty--that such
right or obligation will arise at some point in the
future. * * * [Hallmark Cards, Inc. v. Commissioner, 90
T.C. 26, 34 (1988).]
If, at the end of a year, a taxpayer's liability for an
expense remains contested and contingent, the expense will not be
treated as being established under the all-events test of section
461. See Security Flour Mills Co. v. Commissioner, 321 U.S. 281,
284 (1944); Dixie Pine Prods. Co. v. Commissioner, 320 U.S. 516,
519 (1944). A contested liability will not be regarded as
sufficiently established until resolution of the contest. See
Dixie Pine Prods. Co. v. Commissioner, supra; Dravo Corp. v.
United States, 172 Ct. Cl. 200, 348 F.2d 542, 545 (1965).
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