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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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