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Petitioners apparently do not contest the underlying facts
upon which respondent’s argument relies but instead offer,
without further explanation or support, what would seem to be a
novel legal theory. Section 461 provides general rules with
respect to the proper year for taking deductions, which in turn
rest in part on the taxpayer’s method of accounting under section
446. An accrual method taxpayer, such as KareMor and Mayor in
these cases, is typically entitled to a deduction “in the taxable
year in which all the events have occurred that establish the
fact of the liability, the amount of the liability can be
determined with reasonable accuracy, and economic performance has
occurred with respect to the liability.” Secs. 1.446-
1(c)(1)(ii)(A), 1.461-1(a)(2)(i), Income Tax Regs.; see sec.
461(h)(1), (4).
The first prong of the above test requires the existence of
the liability to be fixed and noncontingent. Vastola v.
Commissioner, 84 T.C. 969, 977 (1985). The second prong
addresses amount, and the interaction of these two requirements
is illustrated by regulation:
While no liability shall be taken into account before
economic performance and all of the events that fix the
liability have occurred, the fact that the exact amount
of the liability cannot be determined does not prevent
a taxpayer from taking into account that portion of the
amount of the liability which can be computed with
reasonable accuracy within the taxable year. For
example, A renders services to B during the taxable
year for which A charges $10,000. B admits a liability
to A for $6,000 but contests the remainder. B may take
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