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not a deduction from gross income.5 See sec. 1.61-3(a), Income
Tax Regs. Despite this contradiction, under the accrual method,
the economic performance requirement must be met for an item to
be deducted or included in cost of goods sold. Secs. 1.446-
1(c)(1)(ii)(B), 1.61-3(a), Income Tax Regs. Accordingly, we look
to whether economic performance has occurred with respect to the
$2,500,000 obligation.6
1. All-Events Test
In order for petitioners to be entitled to deduct their
portion of the $2,500,000 passthrough from National, they must
show that the item meets the requirements of the all-events test.
To satisfy that test, they must show (1) that all events have
occurred which determine the fact of a liability and (2) that the
amount of the liability can be determined with reasonable
accuracy. Sec. 461(h)(4); see Restore, Inc. v. Commissioner,
T.C. Memo. 1997-571, affd. 174 F.3d 203 (11th Cir. 1999); Spitzer
Columbus, Inc. v. Commissioner, T.C. Memo. 1995-397.
5The parties stipulated that National reported the liability
as part of cost of goods sold. Petitioners, however, on brief
contend that the only description of the $2,500,000 item was on
the amended Form 1120S as “PY Accrued Loss on Liability”. The
distinction petitioners make is of no consequence because the
standard for accrual is the same irrespective of whether the item
is a deduction/loss or part of cost of goods sold.
6The parties have not indicated that the amounts of the
redetermined deficiencies will depend upon whether the $2,500,000
item is determined to be a deduction or part of cost of goods
sold. Accordingly, we find it unnecessary to decide that
question.
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