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of the liability, the liability can be determined with reasonable
accuracy, and economic performance has occurred with respect to
the liability. See sec. 1.461-1(a)(2), Income Tax Regs. The
first two requirements comprise the "all events test" for accrual
of a liability. See sec. 461(h)(4). The parties are in agreement
that the amount of petitioner’s liability for royalty expense can
be determined with reasonable accuracy. Respondent also
acknowledges that economic performance has occurred. See sec.
461(h)(2)(A)(iii); secs. 1.461-4(d)(3)(ii) and 1.461-4(d)(7)
Example (9), Income Tax Regs., which provide, in effect, that
economic performance with respect to a royalty based upon sales
during the taxable year, arising from the use of property, occurs
as the sales occur during such taxable year. We are, therefore,
left to decide whether all of the events had occurred as of the
end of each of the audit years that established petitioner’s
liability for royalties attributable to book sales for those
years, including amounts representing royalties that had been
withheld from the authors as "a reasonable reserve for returns".
a. The Author Contracts
The three forms of author contract (the contracts) are
ambiguous with respect to the royalties due the author at yearend
because the contracts discuss authors’ royalties solely in terms
of the amount payable at the royalty payment dates rather than in
terms of the amount owed. Thus, under the contracts, the
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