Tax Court Rules All-Events Test Not Met, Rejects Taxpayer’s Change In Accounting Method

In VECO Corp. et al. v. Commissioner, 141 T.C. No. 14 (Nov. 20, 2013), the Tax Court rejected a taxpayer's proposed change in accounting method because the court determined that the all-events tests had not been met for some deductions and that the recurring item exception to economic performance did not apply to the other deductions claimed.

VECO Corp. was a common parent of an affiliated group that had engaged in various business activities, including oil and gas field services, manufacturing, construction and equipment leasing. The company elected to change its method of accounting for the fiscal year ended March 31, 2005, to (1) deduct liabilities in the year they were incurred under the all events test, with modifications under the recurring item exception for insurance and maintenance agreement payments; and (2) related to rent liabilities for which economic performance was not satisfied by payment, deduct the liabilities in the year in which the liabilities were fixed and could be determined reasonably accurately, and economic performance had occurred.

The IRS determined the taxpayer was not entitled to the deductions and issued a notice of deficiency for the taxpayer's fiscal year ended March 31, 2005. The agency argued that regarding several service contracts, insurance premiums, and real property and equipment leases, the first requirement of the all-events test was not satisfied, because all of the events had not occurred to establish the fact of the liabilities as of March 31, 2005.

Regarding all of the deductions except the insurance premium expense deduction, the IRS argued that the economic performance prong of the all-events test was not satisfied, because the 3 ½ month rule and the recurring item exception did not apply.

VECO Corp. argued that it had satisfied all of the requirements of the all-events test because its execution of the relevant agreements and assumption of binding legal obligations under those agreements fixed the fact of the liabilities underlying the deductions. The taxpayer also argued that it satisfied the economic performance requirement because of the recurring item exception applied.

The Tax Court disagreed with the taxpayer's proposition that the mere execution of a contract, without more, establishes the fact of the liability. The court noted that Rev. Rul. 2007-3 states that the fact of the liability is established on the earlier of the event fixing the liability (such as the required...