Mark N. Wright and Erica Y. Wright - Page 22

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               Under the accrual method, “income is to be included for the            
          taxable year when all the events have occurred that fix the right           
          to receive the income and the amount of the income can be                   
          determined with reasonable accuracy” (all events test).  Sec.               
          1.446-1(c)(1)(ii), Income Tax Regs.  A liability is incurred and            
          taken into account “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”.  Id.  In determining whether an expense amount              
          has been incurred, the all events test generally shall not be               
          treated as met any earlier than when economic performance occurs.           
          Sec. 461(h)(1).                                                             
               “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).  Furthermore:                                        
                    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 or contested.  Nor may a taxpayer                   
               deduct an estimate of an anticipated expense, no matter                
               how statistically certain, if it is based on events                    
               that have not occurred by the close of the taxable                     
               year. [Citations omitted; emphasis added.]                             

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