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National timely filed a 1999 Form 1120S, U.S. Income Tax
Return for an S Corporation, using the accrual and percentage-of-
completion methods of accounting. National claimed a $2 million
reduction of income in the form of cost of goods sold, which
represented the amount owed by National to F&D under the
indemnity agreement. Thereafter, National filed an amended Form
1120S, claiming an additional $500,000 reduction of gross income,
thereby increasing the reduction to $2,500,000. Petitioners
timely filed their 1999 Federal income tax returns claiming their
proportionate shares of the $2,500,000 reduction of income.
Discussion
The parties agree that as of December 31, 1999, National was
obligated to F&D for the reasonable costs incurred by F&D, as
surety under the performance bond, to complete the construction
project. The parties also agree that, as of December 31, 1999,
National admitted that it had an obligation to F&D of more than
$2,500,000. The parties disagree as to whether National’s
obligation, as of December 31, 1999, met the all-events test for
accrual, including the requirements of section 461(h). To decide
this issue, we must determine, as of December 31, 1999, whether:
(1) The fact of a liability could be determined, (2) the amount
of that liability could be determined with reasonable accuracy,
and (3) economic performance occurred with respect to that
liability.
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