14 1 T.C. No . 14

UNITED STAT ES TAX COURT

VECO CORPORATION AND SUBSIDIAR IES, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 24 91 8- 10
. Fil edNov em be r 20 , 20 13
.
On i ts Fed eral in co m e ta x re tu rnforth e ta xabl e y ear e nd in g Mar . 31 , 20 05 (TYE 20 05 ), P, anaccrua l m etho d t ax pa y er, im pl em en te d apro po se d c ha ng e in acco un ti ng m etho d a ndinso do in g a ccel erat edde du ct io ns forpa rts of c ert ai n l iabi li ti es at tri bu tabl e to pe rio ds aft er the clo se of P ’s TYE 20 05 . R reject edP’s pr op os edch an ge inacco un ti ng m etho d a ndde ni edP’s cla im ed acce le rat edde du ct io ns . P cla im s tha t i t was en ti tl edto acce le rat e th e de du ct io ns un de r th e “ al l ev en ts ” te stof I .R.C. se c. 46 1 a nd/o r th e recu rri ng it em

ex cep ti on to th e eco no m ic pe rfo rm an ce ru le s o f I.R.C. se c. 46 1( h) (3 ). Forfin an ci al st at em en t p ur po se s p et it io ne r acc ru ed th e li ab il it ie s o ve r m or e th anon e ta xabl e y ear. P treat edth e li ab il it ie s in co ns is te nt ly for fi na nc ia l s ta te m en t an d t ax pu rp os es . Held : Be cau se ne ithe r th e requi redpe rfo rm an ces no r th e pa ym en t due da te s wi th res pe ctto th e m ajor ity of t he acce le rat ed de du ct io ns oc cu rredbe fo re the clo se of P ’s TYE 20 05 , P fai le d t o sa ti sf y th e fi rs t re qu ire m en t o f th e al l ev en ts tes t o f I.R.C. s ec. 4 61 ;- 2 -

i.e., P fa il edto pro ve th atall of t he ev en ts ha d o ccu rredto est ab li sh th e fac t o f th e li ab il it ie s u nd er s ec. 1 .46 1- 1( a)(2 )(i ), In co m e Tax Reg s. Held , furth er, wit h re sp ectto th e rem ai ni ng acce le rat ed de du ct io ns , P di d n otsat is fy all of t he requi rem en ts forth e rec urrin g it em ex cep ti on un de r I.R.C. s ec. 4 61 (h )(3 ) an d, co ns eque nt ly, is no t ex cep te d fr om

th e g en eral rul e o f I.R.C. s ec. 4 61 (h )(1 ) requi rin g eco no m ic pe rfo rm an ce, b ecau se th e li ab il it ie s u nd erl y in g t he de du ct io ns were p ro rat edov er m or e th anon e ta xabl e y ear, wer e tre at edin co ns is te nt ly for fi na nc ia l s ta te m en t an d t ax pu rp os es , and were m at eri al it em s fo r ta x p ur po se s wi th in th e m ean in g o f I.R.C. s ec. 46 1( h) (3 )(A)(i v) (I). See sec . 1.4 61 -5 (b )(4 ), In co m e Tax Reg s.
Ch ris ti naM. Pas sa rd , forpe ti ti on er. Dav is G. Yee an d Kei th G. Med le au , forres po nd en t.

OPINION MARVEL, Ju dg e: On i ts Fed eral in co m e ta x re tu rnforth e ta xabl e y ear en di ng (TYE) Marc h 3 1, 2 00 5, VECO Co rp . & Subs id iarie s (c ol le ct iv el y , pe ti ti on er o r affi li at edgro up ), whi chus edth e acc ru al m etho d o f acc ou nt in g, im pl em en te d apro po se d c ha ng e in acco un ti ng m etho d t ha t ac cel erat ed ap pr ox im at el y

$5 ,01 0,3 05 of d educ ti on s fo r pa rts of c ert ai n l iabi li ti es att rib ut ab le to pe rio ds aft er the clo se of p et it io ne r’s TYE March 31 , 20 05 . Peti ti on er co nt en ds- 3 -

itwas e nt it le d t o a ccel erat e it s d educ ti on s fo r th es e ex pe ns es un de r th e “ al l ev en ts ” te stof s ect io n 4 61 an d/ orth e rec urrin g i te m ex cep ti onto th e eco no m ic 1 pe rfo rm an ce ru le s u nd er s ect io n 4 61 (h )(3 ). In ano ti ce o f de fic ie nc y da te d Au gu st 17 , 20 10 , res po nd en t d is al lo wedth e p orti on s o f th e d educ ti on s at tri bu tabl e to pe rio ds aft er Ma rch 31 , 20 05 , andacco rd in gl y de te rm in eda $1 ,91 9,3 59 de fic ie nc y in th e Fed eral in co m e ta x o f pe ti ti on er fo r TYE March 31 , 20 05
. Afte r co nc es si on s, th e is su es forde ci si on are: (1) whet he r, un de r th e al l 2
ev en ts tes t o f se ct io n 4 61 , pet it io ne r pr op erl y acce le rat edan d d educ te d o n i ts Fed eral in co m e ta x re tu rnfor TYE March 31 , 20 05 , cert ai n e xp en se s at tri bu tabl e to pe rio ds en di ng aft er TYE Marc h 3 1, 2 00 5; (2) alt ern at iv el y , whet he r se ct io n
Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de , as a m en de d a ndineffec t fo r th e y ear i n i ss ue , andall Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d P ro cedur e. So m e m on et ary am ount s h av e b eenrou nd edto th e n eare stdo ll ar. W ith re sp ectto th e eco no m ic pe rfo rm an ce re qu ire m en t o f th e al l ev en ts 2 te st , pet it io ne r co nc ed es th atitdi d n otsat is fy th e 3 -1 /2 -m on th rul e o f se c. 1.4 61
- 4( d) (6 )(i i), In co m e Tax Reg s., fo r an y of t he de du ct io ns inis su e. W ith re sp ectto th e rec urrin g i te m

ex cep ti on to th e g en eral rul e o f eco no m ic pe rfo rm an ce, pe ti ti on er co nc ed es th atitdi d n otsat is fy th e m at ch in g re qu ire m en t (i .e., th e fo urth requi rem en t o f th e rec urrin g i te m ex cep ti on ) un de r se c. 1.4 61 -5 (b )(1 )(i v) (B) and (5 ), In co m e Tax Reg s., fo r an y de du ct io ns inis su e, with t he ex cep ti on of i ts de du ct io n fo r in su ran ce p rem iu m ex pe ns es . Res po nd en t co nc ed es th atpe ti ti on er sa ti sf ie d the eco no m ic pe rfo rm an ce an d m at ch in g re qu ire m en ts of t he recu rri ng it em ex cep ti on forpe ti ti on er’s cl ai m edde du ct io n fo r in su ran ce p rem iu m ex pe ns es . See s ec. 4 61 (h )(3 )(A)(i i), (i v) ; s ec. 1 .46 1- 5( b) (ii ), (iv ), In co m e Tax Reg s.- 4 -

46 7 p rev en ts pe ti ti on er fro m us in g t he recu rri ng it em

ex cep ti on un de r se ct io n 46 1( h) (3 ) to acce le rat e d educ ti on s fo r ex pe ns es att rib ut ab le to anequi pm en t l eas e an d c ert ai n re al est at e le as es ; an d (3 ) if pe ti ti on er p ro pe rly clai m edde du ct io ns for 3
ex pe ns es un de r am en dm en t XIV t o t he 94 9 Eas t 3 6t h Av enue lea se an d t he 94 9 East36 th Aven ue co m

m erci al subl eas e ag reem en t fo r th e p eri odaft er March31 , 20 05 , whet he r, un de r se ct io n 1 .15 02 -1 3( c), In co m e Tax Reg s., p et it io ne r m us t in cl ud e in in co m e th e ren t p et it io ne r rece iv edun de r th os e le as es forth e sam e pe rio d. Be cau se we co nc lu de th atpe ti ti on er d idno t p ro pe rly deduc t the
acce le rat edex pe ns es att rib ut ab le to pe rio ds aft er Ma rch 31 , 20 05 on it s Fe de ral in co m e ta x re tu rnforTYE March 31 , 20 05 , we do no t re ach is su es (2) an d (3 ). Bac kg ro un d The pa rti es subm itte d thi s ca se ful ly sti pu la te d u nd er Ru le 12 2. We in co rp or at e th e st ip ul at edfact s, an d fa ct s drawnfro m st ip ul at edex hi bi ts , in to ou r fin di ng s b y

th is refe ren ce.

The se lea se s i nc lu de th e Fro nt ie r Bu il di ng lea se , see in fra p p. 2 2- 23 , th e 3 64 11 A Stre etlea se , see in fra p p. 2 3- 24 , am en dm en t XIV t o t he 94 9 Eas t 3 6t h Ave nu e le as e, se e in fra p p. 2 5- 26 , andth e 9 49 East36 th Aven ue co m m erci al subl eas e ag reem en t, s ee i nf ra p p. 2 6- 27
.- 5 -

I. Bac kg ro un d VECO Cor

p. i s a c or po rat io n o rg an iz edan d e xi st in g u nd er Del aware law with i ts pri nc ip al off

ic e in Alas ka . VECO Corp . is th e co m m on pa ren t o f an affi li at edgro up of c or

po rat io ns th atin cl ud es VECO Equ ip m en t, In c. (VECO Equ ip m en t), VECO Servi ces , Inc . (VECO Serv ic es ), VECO Alas ka , Inc . (VECO Alas ka ), VECO USA, Inc. (VECO USA), VECO 36 th Aven ue , Inc . (VECO 36 th

4 5 Ave nu e), VECO Pro pe rti es , Inc . (VECO Pro pe rti es ), Norc on , Inc ., RTX, Inc., 6 HEBL, Inc., an d VECO Fe de ral , Inc
. Pet it io ne r is en ga ge d i n v ari ou s b us in es s ac ti vi ti es in cl ud in g o il an d g as fie ldservi ces , news pape r publ is hi ng , m anuf actur in g, co ns tru ct io n, equi pm en t
ren ta l, wh ol es al e sa le s, l eas in g, an d e ng in eeri ng . Duri ng y ears pre ced in g a nd in cl ud in g the tax ab le y ear i n i ss ue pe ti ti on er en te redin to a nu m be r of servi ce co nt ract s, l ic en si ng co nt ract s, i ns ur an ce co nt ract s, an d re al pro pe rty and equi pm en t l eas es , des cri be d i nf ra.
Dur in g TYE Mar ch31 , 20 05 , VECO Alas kawas asubs id iary of VECO 4 Serv ic es . VECO USA form erl y

was kno wn as Veco Ro cky Mo un ta in , Inc . (Veco 5 Ro cky Mo un ta in ), whi chit se lf f orm erl y was kno wn as VECO Rap le y , Inc ., and/o r Rap le y Eng in eeri ng Serv ic es , Inc . (Rap le y Eng in eeri ng Serv ic es ). Dur in g TYE Mar ch31 , 20 05 , VECO Prop ert ie s was a subs id iary of VECO 6 Equ ip m en t, i ts el f a s ub si di ary of VECO Cor

p.- 6 -

Pet it io ne r pr ep aredco ns ol id at edfin an ci al st at em en ts inacco rd an ce wi th ge ne ral ly accep te d a cco un ti ng pri nc ip le s (GAAP) forfis cal y ears en di ng (FYE) Mar ch31 , 20 05 , 20 06 , and20 07 . Peti ti on er m ai nt ai ne d g en eral led ge rs an d
worki ng tri al ba lanc es foreach m em be r of th e aff il ia te d g ro up forFYE Marc h 3 1, 20 05 . For F ed eral in co m e ta x p ur po se s, p et it io ne r us es th e acc ru al m etho d o f
acco un ti ng an d h as a TYE March 31
. II. Pet it io ne r’s Tax R ep orti ng Pet it io ne r fi le d aFo rm

11 20 , U.S. Corp or at io n In co m e Tax Return, fo r TYE Mar ch31 , 20 05 , onwhi chitrep orte d t ot al in co m e o f $7 1,4 97 ,73 8 andcla im ed to ta l d educ ti on s o f $6 4,6 08 ,98 6. Pet it io ne r at ta ch edto it s re tu rna Fo rm 31 15 , 7 App li cat io n fo r Ch an ge inAcco un ti ng Metho d, fo r TYE March 31 , 20 05 , reque st in g a n a cco un ti ng m etho d c ha ng e p ur su an t t o R ev . Pro c. 20 05 -9 , 20 05 -1 C.B. 3 03
. Pet it io ne r rep orte d o n a n a tt ach m en t t o the Fo rm 31 15 th atitpre se nt ly 8

Pet it io ne r cl ai m edde du ct io ns on a co ns ol id at edba si s an d p er s ub si di ary. 7 Pet it io ne r do es no t h av e d oc um en tati on to sh ow the to ta l ex pe ns es att rib ut ab le to th e so ftwa re l ic en se an d m ai nt en an ce co nt ract s, s erv ic e co nt ract s, re al est at e le as es , andequi pm en t l eas e o n a n e nt ity -s pe ci fic ba si s o r a co ns ol id at edba si s. Rev . Pro c. 20 05 -9 , sec . 1, 2 00 5- 1 C .B. 30 3, p ro vi de s ad m in is tra ti ve 8 pr oc edur es un de r whi cha ta xp ay er m ay ob ta in au to m at ic co ns en t t o c ha ng e to a m etho d o f acc ou nt in g p ro vi de d i n s ect io ns 1.2 63 (a)- 4, 1 .26 3( a)-5 , and1.1 67 (a)- 3( b) , Inc om e Tax Reg s., fo r th e ta xp ay er’s s eco ndtax ab le y ear e nd in g o n o r aft er Decem be r 31 , 20 03
.- 7 -

de du ct edli ab il it ie s as fol lo ws: (1) with re sp ectto li ab il it ie s fo r whi checo no m ic pe rfo rm an ce was sat is fie d b y pa ym en t, p et it io ne r cap it al iz edth e li ab il ity an d
am orti zedth e p aym en t o ve r th e li fe o f th e ag reem en t; (2) with re sp ectto li ab il it ie s fo r whi checo no m ic pe rfo rm an ce was no t s at is fie d b y pa y m en t, p et it io ne r de du ct edth e li ab il it ie s “ in th e p eri odto whi chth ey rel at e.” Pet it io ne r pr op os eda ch an ge init s ac co un ti ng m etho d t o: (1) de du ctli ab il it ie s i n t he y ear i nc urred
un de r th e al l ev en ts tes t, wi th m od ifi cat io ns un de r th e rec urrin g i te m ex cep ti on for in su ran ce an d m ai nt en an ce ag reem en t p aym en ts ; an d (2 ) with re sp ectto ren t li ab il it ie s fo r whi checo no m ic pe rfo rm an ce i s n otsat is fie d b y pa ym en t, d educ t the li ab il it ie s “ in th e y ear t he li ab il it ie s ar e fi xe d a ndde te rm in ab le with re as on ab le
accu racy, andwher e eco no m ic pe rfo rm an ce h as oc curred ”. Pet it io ne r im

pl em en te d i ts pro po se d c ha ng e in acco un ti ng m etho d a nd pr ep aredit s Fo rm

11 20 forTYE March31 , 20 05 , acco rd in gl y . As a res ul t o f th e ch an ge inacco un ti ng m etho d, p et it io ne r cl ai m edde du ct io ns forpre pa idexpe ns es an d a ccru edex pe ns es att rib ut ab le to pe rio ds aft er Ma rch 31 , 20 05 , cla im in g t ha t it s t ax tre atm en t o f th e ex pe ns es was p erm itte d u nd er the all ev en ts tes t o f se ct io n 46 1 a nd/o r th e rec urrin g i te m ex cep ti on un de r se ct io n 4 61 (h )(3 ). Tho se acce le rat edde du ct io ns are atis su e h ere.- 8 -

A. Prep ai d Ex pe nd itur es 1. Asp enTech no lo gy Agreem en t On M arch 31 , 20 03 , VECO Corp . andAsp enTech no lo gy, Inc. (As pe n Tech no lo gy) ent eredin to a so ftware l ic en se an d s erv ic e ag reem en t fo r th e p eri od fro m Marc h 3 1, 2 00 3, thr ou gh Marc h 3 1, 2 00 9 (As pe n a gr eem en t). Un de r th e Asp enag reem en t As pe n Tec hn ol og y li cen se d u se of i ts so ftwa re an d a gr eedto pr ov id e so ftwa re m ai nt en an ce s erv ic es to VECO Cor p. VECO Co rp . agr eedto pa y li cen se fees ov er s ix co ns ecu ti ve y ears as f ol lo ws: (1) $1 61 ,00 0 o n Ap ril 30 , 20 03 ; (2) $2 06 ,00 0 o n M arch 30 , 20 04 ; (3 ) $2 12 ,18 0 o n M arch30 , 20 05 ; (4 )

9 $2 18 ,54 5 o n M arch 30 , 20 06 ; (5 ) $2 25 ,10 2 o n M arch 30 , 20 07 ; an d (6 ) $2 31 ,85 5
on Marc h 3 0, 2 00 8. VECO Co rp . als o a gr eedto pa y anan nu al servi ce fe e o f $1 1,9 45 forth e fi rs t ef

fect iv e y ear o f th e co nt ractan d an ann ua l s erv ic e fee of 1 0 $3 8,0 00 foreach subs eque nty ear. VECO Cor

p. m ad e p aym en ts to Asp enTech no lo gy as fo ll ows : (1 ) $1 72 ,94 5 o n J un e 6 , 20 03 ; (2 ) $3 9,1 40 on Ju ne 29 , 20 04 ; an d (3 ) $4 0,3 14 on Apri l The Asp enag reem en t p ro vi de d t ha t VECO Co rp . hadpre pa idth e li cen se 9 fees un de r a p rio r ag reem en t b y $3 9,0 00 an d t ha t the am ou ntof the fir stli cen se fee p aym en t h adbe enad

jus te d a cco rd in gl y . The Asp enag reem en t p ro vi de d t ha t VECO Co rp . hadpre pa idservi ce fe es 1 0 of $2 6,0 55 un de r a p rio r ag reem en t an d tha t the fir stservi ce fe e p aym en t h adbe en ad jus te d a cco rd in gl y .- 9 -

27 , 20 05 . In Fe brua ry

20 06 VECO Cor

p. re cei ve d a n i nv oi ce d at edFeb ru ary 13 , 20 06 , fro m

Ban k o f Am eri ca Leas in g fo r $2 18 ,54 5 wi thres pe ctto th e Asp en ag reem en t. VECO Co rp . pai d the in vo ic e b y ch eckda te d F eb ru ary 24 , 20 06 , m ad e pa y ab le to Ban k o f Am eri ca Leas in g. Pet it io ne r tr eat ed$2 00 ,23 5, whi chwas attrib ut ab le to th e p eri odApri l 1 to 1 1 Aug us t 1 , 20 05 , as an F YE March 31 , 20 06 , exp en se onit s fi na nc ia l s ta te m en ts for th aty ear. Ho wev er, p et it io ne r de du ct edth e $ 20 0,2 35 on it s re tu rnfor TYE March 31 , 20 05
. 2. Pri m av era Ag reem en t Pri m av era p ro vi de d s of

twar e m an ag em en t s erv ic es forVECO Alas ka pu rs ua ntto a se rv ic e ag reem en t b etweenPri m av era a ndVECO Alas kath atis no t in th e rec or d. Pri m av era i ss ue d a n i nv oi ce d at edDecem be r 31 , 20 04 , for$1 0,6 00 to VECO Alas ka . VECO Alas kapa idth e in vo ic e b y ch eckda te d Ap ril 4, 2 00 5.
The pa rti es st ip ul at edth e am ou ntan d t reat m en t o f th is ex pe ns e fo r 1 1 pe ti ti on er’s fi na nc ia l ac co un ti ng an d t ax rep orti ng pu rp os es . Howev er, pe ti ti on er’s s umm ary an al y si s o f it s Sc he du le M-3 , Net In co m e (Lo ss ) Rec on ci li at io n fo r Co rp or at io ns W ith To ta l As se ts of $ 10 Mi ll io n o r Mo re, s ho ws th atpe ti ti on er ac cel erat edexpe ns es att rib ut ab le to th e Asp enag reem en t o f $2 12 ,18 0. Pe ti ti on er fa il edto off er an y ex pl an at io n, an d t he reco rdco nt ai ns no ev id en ce, as to ho w pet it io ne r cal cu la te d t he am ountof t hi s p art ic ul ar ac cel erat ed de du ct io n.- 10 -

Pet it io ne r tr eat ed$7 ,95 0, whi chwas a ttrib ut ab le to th e p eri odApri l 1 to 1 2 Decem be r 1, 2 00 5, as anFYE Marc h 3 1, 2 00 6, ex pe ns e o n i ts fin an ci al st at em en ts forth aty ear. Ho wev er, p et it io ne r de du ct edth e $ 7,9 50 on it s re tu rnfor TYE March 31 , 20 05
.

3. Surv ey or ’s Exch an ge Agre em en t The reco rddo es no t co nt ai n aco py of th e se rv ic e ag reem en t b etween Surv ey or ’s Exch an ge Co . (Surv ey or ’s Exch an ge ) an d VECO Al as ka
. Surv ey or ’s Exch an ge is su edanin vo ic e d at edMarc h 1 7, 2 00 5, fo r $5 1,8 95 fo r Aut oc adsubs cri pt io n re ne wals to VECO Alas ka . VECO Alas kapa idth e in vo ic e b y

ch eckda te d Ap ril 14 , 20 05
. Fo r fi na nc ia l s ta te m en t p ur po se s, p et it io ne r rec or de d t he Aut oc adexpe ns es on a st rai gh t-l in e b as is ov er the term of i ts co nt ractwith S urve y or ’s Exch an ge . Pet it io ne r tr eat edth e $ 51 ,89 5, wh ic h was att rib ut ab le to th e p eri odApri l 1 , 20 05 , to Marc h 1 , 20 06 , as an F YE March 31 , 20 06 , exp en se on it s fi na nc ia l s ta te m en ts fo r th aty ear. Ho wev er, p et it io ne r de du ct edth e $ 51 ,89 5 o n i ts return fo r TYE Mar ch31 , 20 05
.

The $7 ,95 0 i s equa l t o the po rti onof t he to ta l am ou ntdu e to Pri m av era f or 1 2 se rv ic es pro vi de d dur in g the pe rio d Ap ril 1 t o Dec em be r 1, 2 00 5.- 11 - 4. In ve ns y s Syste m s Ag reem en t InMarc h 2 00 4 VECO USA en te redin to a co m pu te r pr og ram

li cen se ag reem en t wi th Inv en sys Sy st em s, In c. (In ve ns y s) , forth e p eri odMarc h 1 , 20 04 , th ro ug h F eb ru ary 28 , 20 07 (In ve ns y s ag reem en t) t ha t re qu ire d VECO USA t o p ay to ta l l ic en se fees of $ 15 6,5 22 an d t ot al m ai nt en an ce fe es of $ 23 ,47 8. Th e ag reem en t re qu ire d VECO USA t o p ay an nu al li cen se an d m ai nt en an ce fe es of $5 2,1 74 an d $ 7,8 26 , res pe ct iv el y , onMarc h 1 , 20 04 , 20 05 , and20 06
. In ve ns y s i ss ue d t o VECO USA anin vo ic e d at edMarc h 2 2, 2 00 4, fo r $6 4,9 20 co ve rin g the pe rio d fr om Marc h 1 , 20 04 , to Feb ru ary 28 , 20 07
. VECO 1 3 USA pa idth e in vo ic e b y

a ch eckdate d Ap ril 28 , 20 04
. Fo r fi na nc ia l s ta te m en t p ur po se s, p et it io ne r rec or de d t he Inv en sys ag reem en t ex pe ns es on a st rai gh t-l in e b as is ov er the term of t he ag reem en t. Pet it io ne r tr eat ed$5 9,4 20 , whi chwas a ttrib ut ab le to th e p eri odApri l 1 to 1 4 Decem be r 15 , 20 05 , as an F YE March 31 , 20 06 , exp en se onit s fi nanc ia l st at em en ts forth aty ear. Ho wev er, p et it io ne r de du ct edth e $ 59 ,42 0 o n i ts return fo r TYE March 31 , 20 05
. The di ffer en ce b etweenth e $ 60 ,00 0 s pe ci fie d u nd er the Inv en sys 1 3 ag reem en t an d the $6 4,9 20 onth e in vo ic e is att rib ut ab le to sal es tax . Pet it io ne r fai le d t o o ffer

an y ex pl an at io n, an d t he reco rdco nt ai ns no 1 4 ev id en ce, as to ho w pet it io ne r cal cu la te d t he am ountof t hi s p art ic ul ar d educ ti on .- 12 -

B. Exp en di tu res Accru edforPeri od s Aft er Ma rch 31 , 20 05 1. Serv ic e Co nt ract s a. Mar sh Agre em en t On J anua ry

10 , 20 05 , VECO Corp . ent eredin to anin su ran ce b ro ke rag e se rv ic e ag reem en t wi th Mars h USA, In c. (Ma rs h) , forth e p eri odJan ua ry 10 th ro ug h Dec em

be r 31 , 20 05 (Mar sh ag reem en t). Un de r th e Mars h a gr eem en t VECO Cor

p. ag reedto pa y

Mars h afix edfee o f $3 00 ,00 0 p ay ab le as f ol lo ws: (1) $7 5,0 00 on Feb ru ary 1, 2 00 5; (2) $3 0,0 00 on Apri l 1 , 20 05 ; (3 ) $4 5,0 00 onJu ne 30 , 20 05 ; (4 ) $7 5,0 00 on Sep te m be r 30 , 20 05 ; an d (5 ) $7 5,0 00 on Decem be r 31 , 20 05 . VECO Corp . m ad e p aym en ts to Mars h a s fo ll ows : (1 ) $6 0,0 00 on Marc h 4 , 20 05 ; (2 ) $1 20 ,00 0 o n Ap ril 1, 2 00 5; (3) $4 5,0 00 on Ju ne 17 , 20 05 ; an d (4 ) $7 5,0 00 on Octo be r 3, 2 00 5. Fo r fi na nc ia l s ta te m en t p ur po se s p et it io ne r rec or de d the ex pe ns es un de r th e Mar shag reem en t o n astrai gh t-l in e b as is ov er the term of t he ag reem en t. Pet it io ne r tr eat ed$2 25 ,00 0, whi chwas attrib ut ab le to th e p eri odApri l 1 to 1 5 Decem be r 31 , 20 05 , as an F YE March 31 , 20 06 , exp en se onit s fi nanc ia l

Pet it io ne r cal cu la te d thi s amoun t b y ad di ng th e am ou nt s o f th e fo ur 1 5 pa ym en ts itm ad e dur in g 2 00 5 a ndth enm ul ti pl y in g t ha t t ot al by 75%.- 13 -

st at em en ts forth aty ear. Ho wev er, p et it io ne r de du ct edth e $ 22 5,0 00 on it s re tu rn fo r TYE March 31 , 20 05
.

b. ACS Ag reem en t The reco rddo es no t co nt ai n aco py of th e se rv ic e ag reem en t b etweenACS
an d VECO Al as ka
. Fo r fi na nc ia l s ta te m en t p ur po se s p et it io ne r rec or de d the ex pe ns es un de r th e ACS ag reem en t o n astrai gh t-l in e b as is ov er the term of t he ag reem en t. Pet it io ne r tre at ed$1 4,7 79 , whi chwas a ttrib ut ab le to th e p eri odApri l 1 to Decem be r 31 , 1 6 20 05 , as an F YE March 31 , 20 06 , exp en se on it s fi na nc ia l s ta te m en ts forth aty ear. Howev er, p et it io ne r de du ct edth e $ 14 ,77 9 o n i ts return fo r TYE March 31 , 20 05
.

c. Sch wam

m & Frampto n Ag reem en t InFeb ru ary 19 99 VECO Prop ert ie s en te redin to a m an ag em en t ag reem en t with S ch wam

m & Frampto n, LLC (Sc hwa m m & Frampto n) , fora te rm

of o ne y ear, wh ic h aut om at ic al ly w as ren ewedinFeb ru ary of each y ear ( Sch wam

m & Fram pt on ag reem en t). Un de r th e ag reem en t Sc hwa m m & Frampto n a gr eedto pr ov id e p ro pe rty m an ag em en t s erv ic es forUni ve rs ity Pla za, a p ro pe rty owne d b y Pet it io ne r’s su m

m ary an al y si s o f it s Sc he du le M s ho ws tha t VECO Ala sk a 1 6 was requi redto m ak e m on th ly paym en ts to ACS o f $1 ,73 9. Whil e p et it io ne r’s acco un ts pa y ab le ve nd orhi st ory di st rib ut io n t o ACS sh ows th atVECO Alas ka m ad e fai rly regu lar pa ym en ts to ACS, th e p aym en ts m ad e dur in g 2 00 4- 05 ran ge d fro m $1 ,32 1 t o $ 1,3 24 pe r m on th
.- 14 -

VECO Pro pe rti es , andto actas a ge ntforVECO Prop ert ie s. VECO Pro pe rti es ag reedto m ak e m on th ly paym en ts equa l t o the gre at er o f: (1 ) $6 ,25 0 o r (2 ) 4% o f th e m on th ly gro ss ren ta l re cei pt s, as VECO Prop ert ie s re cei ve d s uc h re cei pt s. Dur in g F YE March31 , 20 05 , VECO Prop ert ie s m ad e o ne pa ym en t o f $4 60 to Sch wam

m & Frampto n. OnApri l 2 0, 2 00 5, VECO Pro pe rti es m ad e a p aym en t of $7 ,50 0 t o S ch wam

m & Frampto n. Fo r fi na nc ia l s ta te m en t p ur po se s p et it io ne r rec or de d the ex pe ns es un de r th e Sch wam m & Frampto n a gr eem en t o n astrai gh t-l in e b as is ov er the term of t he ag reem en t. Pet it io ne r tr eat ed$6 ,25 0, wh ic h was att rib ut ab le to th e p eri odApri l 1 to Apri l 3 0, 2 00 5, as anFYE Marc h 3 1, 2 00 6, ex pe ns e o n i ts fin an ci al st at em en ts fo r th aty ear. Ho wev er, p et it io ne r de du ct edth e $ 6,2 50 on it s re tu rnforTYE Mar ch31 , 20 05
. d. Oti s El ev at orAgre em en t InFeb ru ary 20 02 Sch wam m & Frampto n, as ag en t fo r VECO Pro pe rti es , en te redin to a m ai nt en an ce ag reem en t wi th Oti s El ev at orCo . (Oti s El ev at or ) fo r th e p eri odFeb ru ary 1, 2 00 2, thr ou gh Jan uary 31 , 20 07 (Oti s El ev at orag reem en t). Und er the ag reem en t Ot is Elev at orag reedto pro vi de m ai nt en an ce s erv ic es at Uni ve rs ity

Pla za fo r a fee of $ 1,9 50 pe r m on th , andSch wam m & Frampto n a gr eed to m ak e qua rte rly paym en ts on or b efo re the las t d ay of the m on th be fo re the- 15 -

bi ll in g p eri od
. Neithe r VECO Co rp . no r VECO Pro pe rti es m ad e an y di rect 1 7 pa ym en ts to Oti s El ev at or . Fo r fi na nc ia l s ta te m en t p ur po se s p et it io ne r rec or de d the ex pe ns es un de r th e Oti s El ev at orag reem en t o n astrai gh t-l in e b as is ov er the term of t he ag reem en t. Pet it io ne r tr eat ed$1 6,5 75 , whi chwas a ttrib ut ab le to th e p eri odApri l 1 to 1 8 Decem be r 15 , 20 05 , as an F YE March 31 , 20 06 , exp en se onit s fi nanc ia l st at em en ts forth aty ear. Ho wev er, p et it io ne r de du ct edth e $ 16 ,57 5 o n i ts return fo r TYE March 31 , 20 05
.

e. Q-1 Agre em en t InSep te m

be r 19 99 Sch wam

m & Frampto n, as ag en t fo r VECO Pro pe rti es , en te redin to a m ai nt en an ce ag reem en t wi th Q-1 C or p. (Q-1 ) fo r th e p eri od Sep te m be r 15 , 19 99 , th ro ug h S ep te m be r 14 , 20 00 , with aut om at ic ren ewal each y ear ( Q-1 ag reem en t). Un de r th e Q-1 ag reem en t VECO Pro pe rti es ag reedto m ak e
m on th ly paym en ts of $ 9,9 84 form ai nt en an ce s erv ic es , with p aym en t due in
arre ars on th e 1 0th d ay

of t he m on th fol lo win g p ro vi si on of t he servi ces . In

The Oti s El ev at orag reem en t fu rth er p ro vi de d t ha t the bi ll in g p eri odwou ld 1 7 be gi n o n F eb ru ary 1, 2 00 2, the co m m en cem en t d at e. The $1 6,5 75 is equa l t o t he m on th ly paym en t ra te forApri l thr ou gh 1 8 Nov em be r 20 05 pl us anad di ti on al $9 75 att rib ut ab le to th e m on th ly paym en t ra te fo r th e fi rs t h al f of

Decem be r 20 05
.- 16 -

Nov em be r 20 05 VECO Prop ert ie s an d Q-1 am en de d t he Q-1 a gr eem en t t o p ro vi de fo r a m on th ly fee of $ 9,2 21
. Fo r fi na nc ia l s ta te m en t p ur po se s, p et it io ne r rec or de d t he ex pe ns es un de r th e Q-1 ag reem en t o n astrai gh t-l in e b as is ov er the term of the ag reem en t. Pet it io ne r tre at ed$5 9,9 40 , whi chwas a ttrib ut ab le to th e p eri odApri l 1 to Octo be r 15 , 1 9 20 05 , as an F YE March 31 , 20 06 , exp en se on it s fi na nc ia l s ta te m en ts forth aty ear. Howev er, p et it io ne r de du ct edth e $ 59 ,94 0 o n i ts return fo r TYE March 31 , 20 05
.

2. In su ran ce Pr em iu m Agre em en t On Ap ril 28 , 20 05 , VECO Corp . ent eredin to a co m m erci al pre m iu m fin an ce ag reem en t wi th Mars h, an in su ran ce b ro ke r, fo r in suran ce p ol ic ie s wi th effe ct iv e d at es of Ap ril 1, 2 00 5, fo r 12 m on th s o f co ve rag e (i ns ur an ce p rem iu m ag reem en t). Th e ag reem en t p ro vi de d fo r to ta l p rem iu m s o f $3 ,44 5,0 37 an d requi redVECO Cor

p. t o m ak e 1 0 m on th ly paym en ts of $ 31 6,7 14 be gi nn in g M ay 1, 2 00 5.

Altho ug h the Q-1 a gr eem en t was no t am en de d u nt il Nov em be r 20 05 , 1 9 pe ti ti on er’s s umm ary an al y si s o f it s Sc he du le M s ho ws tha t p et it io ne r cal cu la te d th e am ou ntof t he de du ct io n o n the ba si s o f a m on th ly fee of $ 9,2 21 forth e 6 -1 /2
- m on th pe rio d fr om

Apri l 1 to Octo be r 15 , 20 05
.- 17 -

On i ts return fo r TYE March 31 , 20 05 , pet it io ne r de du ct ed$2 ,30 4,1 65 for 2 0 in su ran ce p rem iu m

ex pe ns es att rib ut ab le to th e p eri odApri l 1 to Decem be r 15 , 20 05
. 3. Rea l Pr op erty Leas es a. Arct ic Sp urLeas e On J un e 2 4, 2 00 4, VECO Equ ip m en t en te redin to a le as e ag reem en t wi th Arct ic Sp urInv es tm en ts (Arct ic Sp ur ) fo r pr op erty at 6 41 1 A Street , Anch or ag e, Alas ka(Arct ic Sp ur

lea se ). The t erm

of t he Arct ic Sp urlea se was Jul y 1, 2 00 4, th ro ug h J un e 3 0, 2 00 5. Un de r th e Arct ic Sp urlea se VECO Equ ip m en t ag reedto pa y m on th ly rentof $ 7,5 00 onth e fi rs t d ay of e ach m on th
. Fo r fi na nc ia l an d t ax acco un ti ng pu rp os es VECO Cor p. al lo cat ed$3 ,67 4 o f th e m on th ly rentto it se lf a nd$3 ,82 7 t o VECO Al as ka . For f in an ci al st at em en t pu rp os es pe ti ti on er re co rd edth e ex pe ns es un de r th e Arct ic Sp urlea se on a st rai gh t-l in e b as is ov er the term of t he lea se . Pet it io ne r tr eat ed$1 1,0 22 an d $ 11 ,48 0, wh ic h wer e at tri bu tabl e to th e pe rio d Ap ril 1 t o J un e 3 0, 2 00 5, as FYE Marc h 3 1, 2 00 6, ex pe ns es on it s fi na nc ia l

Pet it io ne r cal cu la te d thi s amoun t b y m ul ti pl y in g t he to ta l p rem iu m by 2 0 81 .96 %, a fig ur e p ur

po rte dl y equa l t o t he am ou ntof the pre m iu m forth e p eri od May 1, 20 05 , th ro ug h F eb ru ary 1, 2 00 6, tha t p et it io ne r ha d p ai d b y Decem be r 15 , 20 05
.- 18 -

st at em en ts forth aty ear. Ho wev er, p et it io ne r de du ct edth e $ 11 ,02 1 (p ai d t hr ou gh VECO Cor

p.) a ndth e $ 11 ,48 0 (p ai d t hr ou gh VECO Alas ka ) on it s re tu rnfor TYE Mar ch31 , 20 05
. b. Wy om in g Lea se On Se pt em

be r 25 , 19 96 , VECO USA ent eredin to a le as e with R oc k S pr in g Pl aza, LLC, fo r of

fic e sp ace a t a p ro pe rty in Wy om in g (Wy om in g l eas e). On Sep te m be r 1, 2 00 4, VECO USA an d TRB #3 Owner s C or p., o wne r of

th e Wy om in g p ro pe rty, am en de d the ori gi na l l eas e to ex te ndth e te rm foron e y ear fro m Sep te m be r 1, 2 00 4, t o Au gu st31 , 20 05 . Und er the Wy om in g l eas e as am en de d VECO USA ag reedto m ak e m on th ly rentpa ym en ts of $ 1,6 94 on th e fi rs t da y of e ach m on th
. Fo r fi na nc ia l s ta te m en t p ur po se s p et it io ne r rec or de d the ex pe ns es un de r th e Wy om in g l eas e o n astrai gh t-l in e b as is ov er the term of t he lea se . Peti ti on er tre at ed$8 ,46 8, wh ic h was att rib ut ab le to th e p eri odApri l 1 th ro ug h Au gu st31 , 20 05 , as an F YE March 31 , 20 06 , exp en se on it s fi na nc ia l s ta te m en ts forth aty ear. Howev er, p et it io ne r de du ct edth e $ 8,4 68 on it s re turnforTYE March 31 , 20 05
.- 19 - c. Gol de n Lea se On Ap ril 17 , 19 99 , Veco Ro cky Mo un ta in en te redin to a le as e wit h Go ld Offi ce Bu il di ng foroff

ic e sp ace a t a p ro pe rty in Go ld en , Col or ad o (Go ld enlea se ). On Fe brua ry

24 , 20 05 , VECO USA andGol d Off ic e Bu il di ng am en de d t he
or ig in al lea se to ex te ndth e te rm fora pe rio d o f on e y ear b eg in ni ng Marc h 1 , 20 05 , an d e nd in g F eb ru ary 28 , 20 06 . Und er the lea se as a m en de d VECO USA ag reedto pa y m on th ly rentof $ 4,4 10 onth e fi rs t d ay of e ach m on th
. Fo r fi na nc ia l s ta te m en t p ur po se s p et it io ne r rec or de d the ex pe ns es un de r th e Gol de n l eas e o n astrai gh t-l in e b as is ov er the term of the lea se . Peti ti on er treat ed $3 4,3 59 , whi chwas a ttrib ut ab le to th e p eri odApri l 1 th ro ug h Dec em be r 15 , 2 1 20 05 , as an F YE March 31 , 20 06 , exp en se on it s fi na nc ia l s ta te m en ts forth aty ear. Howev er, p et it io ne r de du ct edth e $ 34 ,35 9 o n i ts return fo r TYE March 31 , 20 05
.

d. Dur an go Leas e On J un e 1 , 20 04 , VECO USA ent eredin to a le as e wit h Lu nc efo rd In ve st m en ts foroff

ic e sp ace i n Du ran go , Col or ad o (Du ran go lea se ). The t erm of th e Dur an go lea se was J un e 1 , 20 04 , th ro ug h M ay 31 , 20 05 . Und er the Dura ng o

Pet it io ne r’s su m

m ary an al y si s o f it s Sc he du le M s ho ws tha t p et it io ne r 2 1 cal cu la te d thi s amoun t u si ng a m on th ly rentof $ 4,0 42 rathe r th anth e $ 4,4 10 pr ov id edforun de r th e Gol de n l eas e as am en de d.- 20 -

le as e VECO USA agr eedto m ak e m on th ly rentpa ym en ts of $ 2,0 67 on or b efo re th e fi rs t d ay

of t he m on th
. Fo r fi na nc ia l s ta te m en t p ur po se s p et it io ne r rec or de d the ex pe ns es un de r th e Dur an go lea se on a st rai gh t-l in e b as is ov er the term of t he lea se . Peti ti on er treat ed $4 ,13 4, wh ic h was att rib ut ab le to th e p eri odApri l 1 th ro ug h M ay 31 , 20 05 , as an FYE Marc h 3 1, 2 00 6, ex pe ns e o n i ts fin an ci al st at em en ts forth aty ear. Ho wev er, pe ti ti on er d educ te d the $4 ,13 4 o n i ts return fo r TYE March 31 , 20 05
.

e. Bay StreetLeas e On J anua ry

1, 2 00 5, VECO USA en te redin to a le as e ag reem en t wi th Bay Bu il di ng LLC (Bay Bu il di ng ) fo r of fic e sp ace i n B ay

Str eet , W as hi ng to n (B ay Streetlea se ). The t erm

of t he Bay Streetlea se was J anua ry 1, 2 00 5, thr ou gh Decem be r 31 , 20 09 . Und er the Bay Streetlea se , VECO USA agre edto pa y Bay Bu il di ng m on th ly rentof $ 33 ,99 0 b efo re the fir stday of e ach m on th
. Fo r fi na nc ia l s ta te m en t p ur po se s p et it io ne r rec or de d the ex pe ns es un de r th e Bay Streetlea se on a strai gh t-l in e b as is ov er the term of t he lea se . Peti ti on er tre at ed$2 94 ,69 6, whi chwas a ttrib ut ab le to th e p eri odApri l 1 th ro ug h Dec em be r 2 2 15 , 20 05 , as an F YE March31 , 20 06 , exp en se on it s fi na nc ia l s ta te m en ts forth at Pet it io ne r’s su m

m ary an al y si s o f it s Sc he du le M s ho ws tha t p et it io ne r 2 2 cal cu la te d thi s amoun t u si ng a m on th ly rentrat e o f $3 4,6 70 rathe r th anth e $3 3,9 90 pro vi de d fo r un de r th e Bay Stree t l eas e.- 21 -

y ear. Ho wev er, p et it io ne r de du ct edth e $ 29 4,6 96 on it s re tu rnforTYE March 31 , 20 05
. f. Eng le woo d Lea se On M ay 26 , 19 94 , Rap le y

Eng in eeri ng Serv ic es en te redin to a le as e ag reem en t wi th Hig hl an d C ou rt LLC fo r of fic e sp ace i n En gl ewo od , Col or ad o (Eng le woo d l eas e). The term of t he lea se was Jul y

1, 1 99 4, thr ou gh Ju ne 30 , 20 00 . On Dece m

be r 16 , 20 02 , Veco Ro cky Mo un ta in an d P ren ti ss Pro pe rti es am en de d the Eng le woo d l eas e to ex te ndth e te rm forfiv e y ears , fro m

Aug us t 1 , 20 02 , th ro ug h J un e 3 0, 2 00 7. Un de r th e Eng le woo d l eas e as am en de d, Vec o Ro cky Mo un ta in ag reedto pa y

m on th ly bas e ren t o f $4 3,4 50 on or b efo re the fir st da y of e ach m on th
. Fo r fi na nc ia l s ta te m en t p ur po se s, p et it io ne r rec or de d t he ex pe ns es un de r th e Eng le woo d l eas e o n astrai gh t-l in e b as is ov er the term of t he lea se . Peti ti on er tre at ed$3 80 ,10 3, whi chwas a ttrib ut ab le to th e p eri odApri l 1 th ro ug h Dec em be r 2 3 15 , 20 05 , as an F YE March31 , 20 06 , exp en se on it s fi na nc ia l s ta te m en ts forth at y ear. Ho wev er, p et it io ne r de du ct edth e $ 38 0,1 03 on it s re tu rnforTYE March 31 , 20 05
. Pet it io ne r’s su m

m ary an al y si s o f it s Sc he du le M s ho ws tha t p et it io ne r 2 3 cal cu la te d thi s amoun t u si ng a m on th ly rentof $ 44 ,71 8 ra th er tha n t he $4 3,4 50 pr ov id edforun de r th e Eng le woo d l eas e as am en de d.- 22 - g. Fro nt ie r Bu il di ng Leas e On M arch 22 , 20 00 , VECO Corp . ent eredin to a le as e ag reem en t wi th Fro nt ie r Bu il di ng Lim it edPartne rs hi p fo r sp ace a t the Fro nt ie r Bu il di ng in Anc ho rag e, Alas ka(Fro nt ie r Bu il di ng lea se ). The t erm of t he Fro nt ie r Bu il di ng le as e was Ju ly 1, 20 00 , th ro ug h No ve m be r 30 , 20 05 . The Fro nt ie r Bu il di ng lea se requi redVECO Cor

p. t o p ay a fi xe d m in im

um m on th ly rent , subjec t t o i nc reas es ba se d o n the Anch or ag e Co ns um er Pri ce In de x, on th e fi rs t d ay of e ach m on th
. 2 4 2 5 Fo r th e p eri odOcto be r 1, 2 00 3, t o S ep te m be r 30 , 20 04 , th e fi xe d m in im um
m on th ly rentwas $ 17 ,56 9. Fo r th e p eri odOcto be r 1, 2 00 4, t o S ep te m be r 30 , 20 05 , th e fi xe d m in im

um m on th ly rentwas $ 17 ,93 9. 2 6

Fo r 20 04 th e Anc ho rag e Co ns um er Pri ce In de x h ada pe rcen ta ge ch an ge of 2 4 2.5 8%. Fo r 20 05 th e Anc ho rag e Co ns um er Pri ce In de x h ada pe rcen ta ge ch an ge of 3.0 6%. Fo r th e p eri odfro m

Octo be r 1, 2 00 3, thr ou gh Sep te m be r 30 , 20 04 , VECO 2 5 Co rp . pai d the fol lo win g a m ou nt s u nd er the Fro nt ie r Bu il di ng lea se : Oct ob er 20 03 --$ 18 ,58 2; Nov em

be r 20 03 --$ 18 ,66 6; Decem be r 20 03 --$ 18 ,66 6; Janua ry 20 04 --$ 19 ,31 8; Feb ru ary 20 04 --$ 19 ,31 8; Marc h 2 00 4- -$ 19 ,31 8; Apri l 2 00 4-
- $1 9,3 18 ; M ay

20 04 --$ 21 ,11 6; Ju ne 20 04 --$ 19 ,31 8; Ju ly 200 4- -$ 19 ,31 8; Aug us t 20 04 --$ 19 ,31 8; an d S ep te m be r 20 04 --$ 19 ,31 8. The fix edm in im

um m on th ly rentof $ 17 ,93 9 fo r th e p eri odOcto be r 1, 2 6 20 04 , to Sep te m

be r 30 , 20 05 , was l es s tha n a2.5 8% i nc reas e fro m th e m on th ly ren t tha t VECO Co rp . pai d fo r th e p eri odOcto be r 1, 2 00 3, t o S ep te m be r 30 , 20 04
.- 23 -

Fo r fi na nc ia l s ta te m en t p ur po se s p et it io ne r rec or de d the ex pe ns es un de r th e Fro nt ie r Bu il di ng lea se on a st rai gh t-l in e b as is ov er the term of t he lea se . Pet it io ne r tr eat ed$1 07 ,63 7, whi chwas attrib ut ab le to th e p eri odApri l 1 th ro ug h 2 7 Sep te m be r 30 , 20 05 , as an F YE March 31 , 20 06 , exp en se on it s fi na nc ia l st at em en ts forth aty ear. Ho wev er, p et it io ne r de du ct edth e $ 10 7,6 37 on it s re tu rn fo r TYE March 31 , 20 05
.

h. 64 11 A Stre etLeas e On Dec em

be r 22 , 19 99 , VECO Equi pm en t en te redin to a le as e wit h C arrGot ts te in Fo od s C o. fo r pr op erty at 6 41 1 A Street , Anch or ag e, Alas ka(64 11 A Streetlea se ). The t erm

of t he lea se was M arch 1, 2 00 0, t o Dec em be r 31 , 20 10
. The 64 11 A Stre etlea se requi redVECO Equ ip m en t t o p ay a fi xe d m in im

um
m on th ly rentonth e fi rs t d ay of e ach m on th . For t he pe rio d M arch 1, 2 00 4, t o Feb ru ary 28 , 20 05 , th e fi xe d m in im um m on th ly rentwas $ 54 ,59 9. Fo r th e p eri od Mar ch1, 2 00 5, t o F eb ru ary 28 , 20 06 , th e fi xe d m in im um m on th ly rentwas $6 0,6 26
. 2 8

Pet it io ne r’s su m

m ary an al y si s o f it s Sc he du le M s ho ws tha t p et it io ne r 2 7 cal cu la te d thi s amoun t u si ng a m on th ly paym en t ra te of $ 17 ,93 9. The fix edm in im

um m on th ly rentof $ 60 ,62 6 fo r th e p eri odMarc h 1 , 20 05 , 2 8 to Feb ru ary 28 , 20 06 , was l es s tha n a2.5 8% i nc reas e fro m th e m on th ly rentth at pe ti ti on er p ai d fo r th e p eri odOcto be r 1, 2 00 3, t o S ep te m be r 30 , 20 04
.- 24 -

Fo r fi na nc ia l s ta te m en t p ur po se s, p et it io ne r rec or de d t he ex pe ns es un de r th e 64 11 A Stre etlea se on a st rai gh t-l in e b as is ov er the term of t he lea se . Peti ti on er tre at ed$5 15 ,32 4, whi chwas a ttrib ut ab le to th e p eri odApri l 1 th ro ug h Dec em be r 2 9 15 , 20 05 , as an F YE March31 , 20 06 , exp en se on it s fi na nc ia l s ta te m en ts forth at y ear. Ho wev er, p et it io ne r de du ct edth e $ 51 5,3 24 on it s re tu rnforTYE March 31 , 20 05
. i. 94 9 Eas t 3 6t h Av enue On o r ab ou t Au gu st22 , 19 95 , VECO Engi ne eri ng en te redin to a le as e ag reem en t wi th Alas kaPaci fic Uni ve rs ity to ren t p ro pe rty at 9 49 East36 th Ave nu e, Anc ho rag e, Alas ka(94 9 Eas t 3 6t h Av enue lea se ). Und er the 94 9 Eas t 36 th Aven ue lea se VECO Eng in eeri ng ag reedto m ak e m on th ly rentpa ym en ts on orbe fo re the fir stday

of t he m on th . VECO Engi ne eri ng an d Al as kaPaci fic Uni ve rs ity

subs eque nt ly ent eredin to a nu m be r of ag reem en ts am en di ng th e le as e to ex te ndth e te rm

of t he lea se an d t o p ro vi de VECO Eng in eeri ng with i nc reas ed sp ace a t the 94 9 Eas t 3 6t h Av enue pro pe rty. On M arch 1, 1 99 9, VECO Pro pe rti es an d VECO En gi ne eri ng en te redin to
anag reem en t t o a m en d the lea se to ex te ndth e te rm to Decem

be r 31 , 20 05 ,
Pet it io ne r’s su m

m ary an al y si s o f it s Sc he du le M s ho ws tha t p et it io ne r 2 9 cal cu la te d thi s amoun t u si ng a m on th ly paym en t ra te of $ 60 ,62 6.- 25 -

effe ct iv e upo n the clo si ng of t he acqui si ti on of t he 94 9 Eas t 3 6t h Av enue pro pe rty by VE CO Pro pe rti es . On o r ab ou t M arch 7, 1 99 9, Al as kaPaci fic Uni ve rs ity as si gn edit s i nt eres t i n the lea se to pe ti ti on er. As o f Sep te m be r 1, 1 99 9, VECO Eng in eeri ng ass ig ne d i ts in te res t i n t he lea se to VECO Alas ka
. (i) Am en dm en t XIV t o t he 94 9 Eas t 3 6t h Av enue Leas e VECO Pro pe rti es , as l an dl or d, an d VECO Al as ka , as t en an t, s ub se qu en tl y am en de d the 94 9 Eas t 3 6t h Av enue lea se nu m ero us ti m es to pro vi de VECO Alas kawith i nc reas edren ta l s pa ce. All of t he am en dm en ts ex te nd edth e te rm of th e le as e to Decem

be r 31 , 20 05 , exc ep t fo r am en dm en t No . XIV to th e 9 49 East 36 th Aven ue lea se (am en dm en t XIV t o t he 94 9 Eas t 3 6t h Av enue lea se ). Am en dm en t XIV t o the 94 9 Eas t 3 6t h Av enue lea se pro vi de d fo r a l eas e te rm of Apr il 12 , 20 04 , to Apri l 1 1, 2 00 6, fo r 11 ,97 1 s qu are f eetof s pa ce o n t he fou rth flo orof the 94 9 Eas t 3 6t h Av enue pro pe rty at a m on th ly rentof $ 25 ,54 6 fo r th e fir sty ear a nd$2 5,8 90 forth e se co ndy ear. Fo r fi na nc ia l s ta te m en t p ur po se s p et it io ne r rec or de d the ex pe ns es un de r am en dm en t XIV t o the 94 9 Eas t 3 6t h Av enue lea se on a strai gh t-l in e b as is ov er- 26 -

th e te rm of t he am en de d l eas e. Pet it io ne r tr eat ed$2 20 ,06 6, whi chwas 3 0 at tri bu tabl e to th e p eri odApri l 1 th ro ug h Dec em be r 15 , 20 05 , as an F YE March 31 , 20 06 , exp en se on it s fi na nc ia l s ta te m en ts for th aty ear. Ho wev er, p et it io ne r, th ro ug h VECO Al as ka , deduc te d t he $2 20 ,06 6 o n i ts return fo r TYE March 31 , 20 05 . Peti ti on er d idno t i nc lu de th e $ 22 0,0 66 as r en ta l i nc om e o f VECO Pro pe rti es on it s re tu rnforTYE March 31 , 20 05
. (ii ) 94 9 Eas t 3 6t h Av enue Co m m erci al Subl eas e Agr eem en t On J un e 1 , 20 05 , VECO Corp . ent eredin to a co m m erci al lea se ag reem en t with VECO 3 6t h Av enue reg ard in g t he 94 9 Eas t 3 6t h S tre etpro pe rty (94 9 Eas t 36 th Aven ue co m

m erci al lea se ag reem en t). Th e te rm of t he lea se was Jun e 1 , 20 05 , to May 31, 2 02 0. Un de r th e 9 49 East36 th Aven ue co m m erci al lea se ag reem en t VECO Co rp . agr eedto pa y m on th ly rentof $ 22 2,4 99 on or b efo re the fir stda y of e ach m on th , with i nc reas es inth e m on th ly rentba se d o n t he Co ns um er Pri ce In de x. On J un e 1 , 20 05 , VECO Corp . ent eredin to a co m m erci al subl eas e ag reem en t wi th VECO Alas kareg ard in g t he 94 9 Eas t 3 6t h Av enue pro pe rty (94 9 East36 th Aven ue co m

m erci al subl eas e ag reem en t). Th e te rm of t he subl eas e was Pet it io ne r’s su m

m ary an al y si s o f it s Sc he du le M s ho ws tha t p et it io ne r 3 0 cal cu la te d thi s amoun t u si ng a m on th ly paym en t ra te of $ 25 ,89 0.- 27 -

Ju ne 1, 2 00 5, t o M ay

31 , 20 20 . Und er the 94 9 Eas t 3 6t h Av enue co m m erci al
subl eas e ag reem en t VECO Ala sk a ag reedto pa y m on th ly rentof $ 22 4,2 06 on or be fo re the fir stda y

of e ach m on th , with i nc reas es inth e m on th ly rentba se d o n the Co ns um er Pri ce In de x. Fo r fi na nc ia l s ta te m en t p ur po se s, p et it io ne r rec or de d t he ex pe ns es un de r th e 94 9 Eas t 3 6th Av enue co m m erci al subl eas e ag reem en t o n astrai gh t-l in e b as is ov er th e te rm of t he subl eas e ag reem en t. Pet it io ne r tr eat ed$2 21 ,07 0, whi chwas 3 1 at tri bu tabl e to a two -m on th ren ta l p eri odco m m en ci ng aft er Ma rch 31 , 20 05 , as an FYE Marc h 3 1, 2 00 6, ex pe ns e o n i ts fin an ci al st at em en ts forth aty ear. Ho wev er, pe ti ti on er, thr ou gh VECO Alas ka , deduc te d t he $2 21 ,07 0 o n i ts return fo r TYE Mar ch31 , 20 05 . Peti ti on er d idno t i nc lu de th e $ 22 1,0 70 as r en ta l i nc om e o n i ts return fo r TYE March 31 , 20 05
.

4. IKON Equ ip m en t Lea se On M ay 21 , 20 04 , VECO Serv ic es an d IKON Fi na nc ia l Se rv ic es (IKON)
en te redin to anequi pm en t l eas e (IKON equi pm en t l eas e) fo r a t erm of 6 0 m on th s. Und er the IKON equ ip m en t l eas e an d t he acco m panyin g p ro du ctsch edul e, VECO Pet it io ne r’s su m

m ary an al y si s o f it s Sc he du le M s ho ws tha t p et it io ne r 3 1 cal cu la te d thi s amoun t u si ng a m on th ly paym en t ra te of $ 11 0,5 35 . Peti ti on er fai le d t o o fferan y

ex pl an at io n, an d t he reco rdco nt ai ns no ev id en ce, as to why pe ti ti on er u se d am on th ly paym en t ra te of $ 11 0,5 35 rathe r th anth e am ou nt sp eci fie d i n the 94 9 Eas t 3 6t h Av enue co m m erci al subl eas e ag reem en t.- 28 -

Serv ic es ag reedto m ak e m on th ly rentpa ym en ts of $ 25 ,78 5, wi th th e fi rs t p aym en t
m ad e o n o r be fo re the effe ct iv e d at e an d t he rem ai ni ng pa ym en ts m ad e o n t he 3 2
sa m e d ay each m on th . On Ja nu ary 14 , 20 05 , VECO Alas kaan d IKON am en de d th e IKON equi pm en t l eas e to pro vi de foranin crea se d m in im um m on th ly paym en t of $2 7,7 80 . On Apr il 13 , 20 05 , VECO Serv ic es an d IKON am en de d t he IKON equi pm en t l eas e to pro vi de for anin crea se d m in im

um m on th ly paym en t o f $2 8,0 02 . On March 28 , 20 07 , VECO Serv ic es an d IKON am en de d t he IKON equi pm en t l eas e to pro vi de for anin crea se d m in im

um m on th ly paym en t o f $3 7,1 28
. Pet it io ne r tr eat ed$2 25 ,73 8, whi chwas attrib ut ab le to th e p eri odApri l 1 3 3 th ro ug h Dec em

be r 15 , 20 05 , as an F YE March 31 , 20 06 , exp en se init s fi na nc ia l st at em en ts forth aty ear. Ho wev er, p et it io ne r de du ct edth e $ 25 5,7 39 on it s re tu rn fo r TYE March 31 , 20 05
.

The reco rddo es no t s ho w th e effe ct iv e d at e o f th e IKON equi pm en t l eas e. 3 2 VECO Serv ic es en te redin to th e m as te r ag reem en t wi th res pe ctto th e IKON equi pm en t l eas e o n M ay

21 , 20 04 , anden te redin to th e p ro du ctsch edul e o n J ul y 15 , 20 04
. Pet it io ne r’s su m

m ary an al y si s o f it s Sc he du le M s ho ws tha t p et it io ne r 3 3 cal cu la te d thi s amoun t u si ng a m on th ly rent al rat e o f $3 0,0 87 rathe r th anth e rat e pr ov id edforun de r th e IKON equi pm en t l eas e as am en de d.- 29 -

III. Not ic e o f Defi ci en cy Res po nd en t i ss ue d t o p et it io ne r th e n ot ic e o f de fic ie nc y forTYE March 31 , 20 05 , det erm in in g tha t p et it io ne r was no t p erm it te d t o c ha ng e it s m etho d o f
acco un ti ng forit s p rep ai d a ndaccrue d e xp en di tu res . Accor di ng ly, res po nd en t di sa ll owe d p orti on s o f pe ti ti on er’s cl ai m edde du ct io ns as f ol lo ws: (1) $2 00 ,23 5
un de r th e Asp enag reem en t; (2) $7 ,95 0 u nd er the Pri m av era a gr eem en t; (3) $5 1,8 95 un de r th e Su rv ey or ’s Exch an ge ag reem en t; (4) $5 9,4 20 un de r th e In ve ns y s ag reem en t; (5) $2 25 ,00 0 u nd er the Mars h a gr eem en t; (6) $1 4,7 79 un de r th e ACS ag reem en t; (7) $1 6,5 75 un de r th e Oti s El ev at orag reem en t; (8) $6 ,25 0
un de r th e Sch wam

m & Frampto n a gr eem en t; (9) $5 9,9 40 un de r th e Q-1 ag reem en t; (10 ) $2 ,30 4,1 65 un de r th e in su ran ce p rem iu m ag reem en t; (11 ) $2 2,5 01
un de r th e Arct ic Sp urlea se ; (1 2) $8 ,46 8 und er the Wy om in g l eas e; (13 ) $3 4,3 59
un de r th e Gol de n l eas e; (14 ) $4 ,13 4 u nd er the Dura ng o l eas e; (15 ) $2 94 ,69 6 u nd er th e Bay Stree t l eas e; (16 ) $3 80 ,10 3 u nd er the Eng le woo d l eas e; (17 ) $1 07 ,63 7
un de r th e Fro nt ie r Bu il di ng lea se ; (1 8) $5 15 ,32 4 u nd er the 64 11 A Stre etlea se ; (1 9) $2 20 ,06 6 und er am en dm en t XIV t o t he 94 9 Eas t 3 6t h Av enue lea se ; (2 0) $2 21 ,07 0 u nd er the 94 9 Eas t 3 6t h Av enue co m m erci al subl eas e ag reem en t; an d (2 1) $2 55 ,73 8 und er the IKON equ ip m en t l eas e. Res po nd en t d et erm in edth at pe ti ti on er was no t en ti tl edto th es e d educ ti on s b ecau se : (1 ) pe ti ti on er fa il edto- 30 -

es tabl is h tha t i t i nc urredth e rel at edex pe ns es du rin g TYE Mar ch31 , 20 05 an d 3 4 (2 ) pe ti ti on er’s m etho d o f cl ai m in g t he de du ct io ns di d n otcle arl y refl ectin co m e withi n the m ean in g o f se ct io n 4 46 (b ). Res po nd en t al te rn at iv el y de te rm in edth atif VECO Alas kawas e nt it le d t o d educ ti on s o f $2 20 ,06 6 a nd$2 21 ,07 0 fo r ex pe ns es un de r am en dm en t XIV t o the 94 9 Eas t 3 6t h Av enue lea se an d t he 94 9 Eas t 3 6t h Ave nu e co m

m erci al subl eas e ag reem en t, VECO Pro pe rti es was re qu ire d t o reco gn iz e th e rec ei ptof i nc om e to th atex te ntun de r se ct io n 1 .15 02 -1 3, In co m e Tax Reg s. Dis cu ss io n I. Bu rd enof P ro of Gen eral ly, th e Co m

m is si on er’s d et erm in at io ns ina no ti ce o f de fic ie nc y are pr es um edco rrec t, an d the tax pa y er b ears th e b ur de n o f pr ov in g tha t the de te rm in at io ns are erro ne ou s. See Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 3 5
Res po nd en t al so de te rm in edth atev enif p et it io ne r sa ti sf ie d t he all ev en ts 3 4 te stof s ec. 4 61 forth e cl ai m edde du ct io ns , pet it io ne r was requi redto cap it al iz e th os e am ou nt s u nd er s ec. 2 63 (a). Whe re a t ax pa y er h as reque st edth e Co m m is si on er’s co ns en t t o c ha ng e it s 3 5 m etho d o f acc ou nt in g, thi s C ou rt g en eral ly revi ews th e Co m m is si on er’s ref

us al to gi ve co ns en t fo r ab us e o f di sc ret io n. Se e Cap it ol Fed . Sav . & Loan Ass ’n v. Co m m is si on er, 9 6 T.C. 2 04 , 20 9- 21 0 (1 99 1) . The u se of a n abu se of d is cret io n st an da rdis pre m is edon th e id ea tha t the Co m m is si on er’s “ de te rm in at io n wi th res pe ctto th e is su e o f whe th er i nc om e is refl ect edcle arl y is en ti tl edto m or e th an

(co nt in ue d...)- 31 -

11 1, 1 15 (19 33 ). Howev er, i f a t ax pay er p ro du ces cred ib le ev id en ce wi th res pe ct to a factua l i ss ue rel ev an t t o a sc ert ai ni ng th e ta xp ay er’s Fed eral in co m e ta x li ab il ity , th e b ur de n o f pr oo f as to th atis su e m ay sh iftto th e Sec ret ary un de r 3 6
se ct io n 7 49 1( a)(1 ) if

th e ta xp ay er s at is fie s ce rta inrequi rem en ts un de r se ct io n 74 91 (a)( 2)
. 3 7
(...co nt in ue d) 3 5 th e u su al pre su m

pt io n o f co rrec tn es s.” Id . at 2 09
. Inth e n ot ic e o f de fic ie nc y res po nd en t re

jecte d p et it io ne r’s at te m

ptto ch an ge it s fo rm er m etho d o f acc ou nt in g wi th res pe ctto th e d is pu te d d educ ti on s. Res po nd en t ex pl ai ne d tha t p et it io ne r ha d fa il edto est ab li sh th atpe ti ti on er i nc urred th e ex pe ns es att rib ut ab le to th e d is pu te d d educ ti on s i n i ts TYE March 31 , 20 05 , an d i n a dd it io n, p et it io ne r’s m etho d o f cl ai m in g t he di sp ut edde du ct io ns di d n ot cl earl y refl ectin co m e wit hi n the m ean in g o f se c. 44 6( b) . Howev er, i n res po nd en t’s b rie f res po nd en t ar gu es on ly that p et it io ne r fai le d t o e st ab li sh th atit in cu rredth e ex pe ns es att rib ut ab le to th e d is pu te d d educ ti on s i n i ts TYE March 31 , 20 05 . Res po nd en t d oe s n otco nt en d t ha t thi s C ou rt s ho ul d re vi ew res po nd en t’s de te rm in at io ns inth e n ot ic e o f de fic ie nc y forab us e o f di sc ret io n. The term “ Secr et ary” m ean s “ th e Sec ret ary of th e Treas ury

or h is 3 6 de le ga te ”, se c. 77 01 (a)( 11 )(B) , andth e te rm “ orhi s d el eg at e” m ean s “ an y off ic er, em pl oyee, or a ge nc y

of the Treas ury

Depa rtment dul y

au th or iz edby the Secr et ary of th e Treas ury

di rect ly, orin di rect ly by on e o r m or e red el eg at io ns of aut ho rit y , to pe rfo rm th e fu nc ti on m en ti on edor d es cri be d i n t he co nt ex t” , sec . 77 01 (a)( 12 )(A)(i ). If the tax pa y er i s a p artne rs hi p, a c or po rat io n, o r a tru st(ot he r th ana 3 7 qu al ifi edrev oc ab le tru stas d efi ne d i n s ec. 6 45 (b )(1 )), s ec. 7 49 1( a)(2 ) requi res th e ta xp ay er t o e st ab li sh , am on g o th er thi ng s, tha t i t m eet s the requi rem en ts of s ec. 74 30 (c)( 4) (A)(i i) ( whi chintu rnrefe ren ces th e n etwort h re qu ire m en ts of 2 8 U.S.C. se c. 24 12 (d )(2 )(B) ).- 32 -

Pet it io ne r do es no t ar gu e th atsec ti on 74 91 (a)( 1) sh ift s the bu rd enof p ro of to res po nd en t. Inad di ti on , pet it io ne r ha s n otest ab li sh ed(no r do we fin d) th atitsat is fie d the requi rem en ts of s ect io n 7 49 1( a)(2 ). Pet it io ne r be ars th e bu rd enof p ro of

. See Ru le 14 2( a). II. The All Even ts Test A. In tro du ct io n Sect io n 4 61 (a) p ro vi de s tha t a d educ ti on m us t b e ta ke n fo r th e p ro pe r ta xabl e y ear u nd er the tax pa y er’s m etho d o f acc ou nt in g. Accrua l m etho d ta xp ay ers ge ne ral ly are all owe d ade du ct io n fo r th e y ear i n wh ic h t he tax pa y er in cu rredth e ex pe ns e, reg ard le ss of t he actua l d at e o f pa ym en t. Sec . 46 1( h) (4 );
se c. 1.4 61 -1 (a)( 2) , Inc om e Tax Reg s.; see als o In te rex , Inc . v. Co m mis si on er, 3 21 F.3 d 5 5, 5 8 (1 stCir . 20 03 ) (“ Accru al m etho d t ax pa y ers m ay de du ctex pe ns es whe n the y

are i nc urredev enif the y ha ve no t yet be enpa id [.]”), aff’g T.C. Mem o. 20 02 -5 7. 3 8

Co nv ers el y , a tax pa y er m ay no t d educ t ei th er a p rep ai d a m ou ntor a n 3 8 am ountpa idwitho uta le ga l o bl ig at io n t o d o s o a ny earli er tha n t he tax ab le y ear i n whi chsu cham ou ntis in cu rred . Sec. 1 .44 6- 1( c)(i i)( B), In co m e Tax Reg s. Acco rd in gl y , we nee d n otco ns id er the am ou ntan d t im in g o f paym en ts pe ti ti on er actua ll y m ad e wit h re sp ectto each of t he li ab il it ie s b ecau se ev enif p et it io ne r m ad e su chpa ym en t dur in g TYE Mar ch31 , 20 05 , pet it io ne r is no t en ti tl edto a de du ct io n fo r th e rel at edex pe ns e unl es s p et it io ne r al so in curreda li ab il ity forth at ex pe ns e dur in g TYE Mar ch31 , 20 05
.- 33 -

Whe th er an accrua l m etho d t ax pa y er h as in curredanex pe ns e is de te rm in ed
un de r th e “ al l ev en ts tes t” . See s ec. 1 .46 1- 1( a)(2 )(i ), In co m e Tax Reg s. Un de r th e al l ev en ts tes t, “ a li ab il ity * * * i s i nc urred , andge ne ral ly is t ak enin to acco un t fo r Fed eral in co m e ta x p ur

po se s, i n t he tax ab le y ear i n wh ic h a ll th e ev en ts ha ve oc cu rredth atest ab li sh th e fac t o f th e li ab il ity , th e am ountof t he li ab il ity canbe de te rm in edwith re as on ab le accu racy, andeco no mic pe rfo rm an ce h as oc cu rred with re sp ectto th e li ab il ity .” Id .; s ee al so Uni te d S ta te s v . Gen. Dynam ic s C or p., 48 1 U.S. 2 39 , 24 2- 24 3 (1 98 7) ; Un it edSta te s v . And ers on , 26 9 U.S. 4 22 , 44 1 (1 92 6) ; Ca lt ex Oil Ventur e v . Comm is si on er, 1 38 T.C. 18 , 23 (20 12 ). An ac cru al ba si s t axpa y er cl ai m in g tha t i t i nc urreda li ab il ity forFed eral in co m e ta x p ur po se s
m us t s at is fy

each of t he th ree r equi rem en ts un de r th e al l ev en ts tes t i n o rd er t o cl ai m a de du ct io n fo r th e li ab il ity . Res po nd en t d oe s n otdi sp ut e th atth e se co ndrequi rem en t o f th e al l ev en ts te st(i.e ., th atth e am ou ntof t he li ab il ity was d et erm in ab le with re as on ab le
accu racy) was s at is fie d wi th res pe ctto th e d is pu te d d educ ti on s. Ra th er, res po nd en t d is pu te s wh ethe r th e fi rs t an d t hi rdrequi rem en ts were s at is fie d. With
res pe ctto th e d is pu te d d educ ti on s at tri bu tabl e to th e Mars h, ACS , Sch wam m & Fram pt on , Oti s El ev at or , andQ-1 a gr eem en ts , as wel l as th e in su ran ce p rem iu m ex pe ns e d educ ti on an d the real pro pe rty andequi pm en t l eas e ex pe ns e d educ ti on s,- 34 -

res po nd en t co nt en ds th atth e fi rs t re qu ire m en t o f th e al l ev en ts tes t was no t
sa ti sf ie d b ecau se all th e ev en ts ha d n otoc cu rredto est ab li sh th e fac t o f th es e li ab il it ie s as of M arch 31 , 20 05 . W ith re sp ectto all of t he de du ct io ns ex cep t the in su ran ce p rem iu m

ex pe ns e d educ ti on , res po nd en t co nt en ds th atth e th ird requi rem en t (e co no mic pe rfo rm an ce) o f th e al l ev en ts tes t was no t s at is fie d be cau se : (1 ) th e 3 -1 /2 -m on th rul e o f se ct io n 1 .46 1- 4( d) (6 )(i i), In co m e Tax Reg s., do es no t ap pl y

an d (2 ) pe ti ti on er i s n oten ti tl edto rel y on th e rec urrin g i te m ex cep ti on to th e eco no m ic pe rfo rm an ce re qu ire m en t. Pet it io ne r co nt en ds th atitsat is fie d e ach requi rem en t o f th e al l ev en ts tes t. Pet it io ne r arg ue s tha t i t s at is fie d t he fir strequi rem en t b ecau se it s ex ecu ti on of t he rel ev an t ag reem en ts , andass um pt io n o f bi nd in g l eg al ob li ga ti on s the reu nd er, fi xe d th e fac t o f th e li ab il it ie s u nd erl y in g t he di sp ut edde du ct io ns . Peti ti on er al so arg ue s th atitsat is fie d the eco no mic pe rfo rm an ce re qu ire m en t b ecau se th e rec urrin g i te m ex cep ti on of s ect io n 4 61 (h )(3 ) ap pl ie s. W e fi rs t ad dr es s re sp on de nt ’s con te nt io n t ha t the factof p et it io ne r’s li ab il it ie s u nd er the Mars h, ACS , Sch wam m & Frampto n, Ot is Elev at or , andQ-1 ag reem en ts , th e in su ran ce p rem iu m ag reem en t, an d t he real pro pe rty and equi pm en t re nt al ag reem en ts was n otfix edas o f th e cl os e o f th e ta xabl e y ear i n is su e. W e th enan al yze wh ethe r th ere was eco no m ic pe rfo rm an ce wi th res pe ctto- 35 -

th e d is pu te d d educ ti on s. If p et it io ne r was en ti tl edto rel y on th e rec urrin g i te m ex cep ti on with re sp ectto th e d is pu te d d educ ti on s, the n t he eco no m ic pe rfo rm an ce requi rem en t o f th e al l ev en ts tes t i s s at is fie d. B. Factof the Liab il ity The term “ li ab il ity ” ref

ers to “ an y

it em all owabl e as a de du ct io n, co st , or ex pe ns e fo r Fed eral in co m e ta x p ur po se s.” Se c. 1.4 46 -1 (c)( ii )(B) , Inc om e Tax Reg s. Gen eral ly, th e fac t o f a l iabi li ty is es tabl is he d o n the earl ie r of : (1 ) th e ev en t fi xi ng th e li ab il ity , su chas t he requi redpe rfo rm an ce o r (2 ) th e d at e th e pa ym en t i s u nc on di ti on al ly due . See Re v. Ru l. 2 00 7- 3, 2 00 7- 1 C .B. 35 0; Rev
. Ru l. 8 0- 23 0, 1 98 0- 2 C .B. 16 9; Rev . Rul . 79 -4 10 , 19 79 -2 C.B. 2 13
. Pet it io ne r arg ue s tha t ac tu al pa ym en t o f anex pe ns e is no t re qu ire d t o es tabl is h the factof t he li ab il ity . As d is cu ss edsupr a, anaccrua l m etho d t ax pa y er 3 9
m ay de du ctanex pe ns e fo r a t ax ab le y ear b efo re the y ear i n wh ic h the tax pa y er actua ll y rem it s p aym en t p ro vi de d t ha t the tax pa y er i nc urredth e ex pe ns e dur in g the Pet it io ne r al so arg ue s tha t “ co urts have rep eat ed ly rejectedth e 3 9 Res po nd en t’s ar gu m en ts th ata li ab il ity is no t fi xe d u nt il th e ti m e h as co m e fo r pa ym en t o f th e o bl ig at io n.” Pet it io ne r, ho wev er, o ve rs ta te s re sp on de nt ’s arg um en t. Res po nd en t co nt en ds th atall ev en ts ha ve oc cu rredto est ab li sh th e fac t of a ta xp ay er’s l iabi li ty upo n the earl ie r of th e ev en t fi xi ng th e li ab il ity or t he pa ym en t due da te . Accor di ng ly, res po nd en t co nt en ds th ata li ab il ity m ay be fix ed be fo re the pa ym en t due date pro vi de d t ha t the ev en t fi xi ng th e li ab il ity alr eady oc cu rred . Furt he rm or e, in res po nd en t’s an swe rin g b rie f, res po nd en t s pe ci fic al ly ackno wled ge s tha t “ actua l p aym en t i s n otrequi redto fix th e li ab il ity .”- 36 -

ta xabl e y ear f

orwhi chitcla im edth e d educ ti on . Sec. 4 61 (h )(4 ); s ec. 1 .46 1- 1( a)(2 ), In co m e Tax Reg s.; see als o Un it edSta te s v . Hug he s Pr op s. In c., 47 6 U.S. 59 3, 5 99 (19 86 ); I nt erex , Inc . v. Co m m is si on er, 3 21 F.3dat 5 7- 58 . “ [A]lth ou gh
ex pe ns es m ay

be de du ct ib le be fo re the y ha ve be co m e due an d p ay ab le , li ab il ity
m us t fi rs t b e fi rm ly establ is he d.” Gen. Dyna mic s C or p., 4 81 U.S. at 2 43
. Acco rd in gl y , we agr ee wi th pe ti ti on er tha t ac tu al pa ym en t i s n otne ces saril y requi redto est ab li sh th atpe ti ti on er’s l iabi li ty for anex pe ns e is fix edun de r th e al l
ev en ts tes t. Pet it io ne r arg ue s tha t upo n i ts en te rin g i nt o t he va rio us ag reem en ts , it s li ab il it ie s u nd er tho se ag reem en ts be cam e fi xe d b y vi rtu e o f it s as su m

pt io n o f th e co nt ractua l o bl ig at io ns . Alth ou gh pe ti ti on er an d re sp on de ntag ree t ha t a s tatu te 4 0
orreg ul at io n s om et im es m ay op erat e to fix a ta xp ay er’s l iabi li ty, th e p art ie s di sa gr ee re ga rd in g wh ethe r pe ti ti on er’s ex ecu ti on of e ach ag reem en t co ns ti tu te d
anev en t tha t fi xe d p et it io ne r’s li ab il ity forth e en ti re o bl ig at io n und er the ag reem en t.

Furth erm or e, th is Co urt h as he ldth atth e fac t tha t a l iabi li ty is fi xe d b y 4 0 st atut e d oe s n otco nt ro l wh ethe r th e li ab il ity is fix edforpu rp os es of t he all ev en ts te st . See Ch ry sl er Co rp . v. Co m m is si on er, T.C. Mem o. 2 00 0- 28 3, af f’d, 43 6 F .3d 64 4 (6 thCir . 20 06 ).- 37 -

The ex ecu ti on of aco nt ractco nt em pl at in g p aym en t, wi th ou t m or e, is no t an
ev en t tha t fi xe s the pa y or ’s li ab il ity . See Sp en cer, Whi te & Pren ti s v . Co m m is si on er, 1 44 F.2d45 , 47 (2dCir . 19 44 ) (“ It i s wel l s et tl edth atde du ct io ns
m ay on ly be take n fo r th e y ear i n wh ic h the tax pa y er’s l iabi li ty to p ay be co m es de fin it e an d c ert ai n, ev enth ou gh th e tr an sa ct io ns (su chas t he co nt ractinth e pr es en t ca se ) whi choc cas io ne d the li ab il ity , m ay ha ve tak enpl ace i n a n e arl ie r y ear.” ). In p art ic ul ar, wh ere aco nt ract“ co nt ai ns m utua ll y de pe nd en t p ro m is es , li ab il ity un de r itis co nt in ge ntup on pe rfo rm an ce o r te nd eredpe rfo rm an ce”, andis
no t fi xe d b y

m erel y en te rin g i nt o t he co nt ract . Levi n v . Comm is si on er, 2 19 F.2d 58 8, 5 89 (3dCir . 19 55 ), aff’g 2 1 T.C. 9 96 (19 54 ); s ee al so Gul f Oil Co rp . v. Co m m is si on er, 9 14 F.2d39 6, 4 09 (3dCir . 19 90 ) (“ Unc on di ti on al li ab il ity un de r anex ecu to ry

co nt ractis no t cr eat edun ti l atlea ston e p arty pe rfo rm s.”) , aff’g 8 6 T.C. 11 5 (1 98 6) . For e xa m pl e, th is Co urt h as he ldth attax pa y ers who en te redin to
a co nt ractiny ear 1 forth e p ro vi si on of s erv ic es iny ears 1 an d 2 were n oten ti tl ed to de du ctth e en ti re am ou ntof t he co nt ractpri ce i n year 1 b ecau se th ey ha d n ot in cu rredth e en ti re am ountof t he li ab il ity iny ear 1 . Levi n v . Comm is si on er, 2 1 T.C. 99 6. In s o h ol di ng , th is Co urt s tate d t ha t “ itha s b eenwell est ab li sh edth at

4 1 InLevi n v . Comm is si on er, 2 1 T.C. 9 96 (19 54 ), aff’d, 2 19 F.2d58 8 (3 d 4 1 Ci r. 19 55 ), th e ta xp ay ers were p artne rs ina bu si ne ss th atm anuf actur ed , pro du ced , (co nt in ue d...)- 38 -

th e acc ru al m etho d o f acc ou nt in g d oe s n otpe rm itth e an ti ci pa ti on inth e ta xabl e y ear o f fu tu re ex pe ns es inothe r y ears pri or to th e ren di ti on of t he servi ces fix in g th e li ab il ity

forwhi chth e p aym en t i s t o b e m ad e.” Id . at 9 99
. Pet it io ne r ci te s num ero us cas es th atitcla im s s tandforth e p ro po si ti on th at th e ex ecu ti on of aco nt ractfix es a ta xp ay er’s l iabi li ty for the en ti re am ou ntof t he
co nt ractpri ce. Non e o f th e cas es , ho wev er, s tandforth e p ro po si ti on th atth e 4 2 (...co nt in ue d) 4 1 an d s ol d fo odpro du ct s. OnDecem be r 12 , 19 46 , th e b us in es s en te redin to an adve rti si ng co ntractwith atwo -y ear t erm . Id. at99 6- 99 7. Un de r th e te rm s o f th e co nt ract , th e ta xp ay ers were t o p ay th e adve rti si ng ag en t $ 73 3 p er m on th in ex ch an ge forth e adve rti se m en t o f th ei r fo odpro du ct s. Id . On Dece m be r 17 , 19 46 , th e adve rti si ng ag en t s en t t o t he tax pa y ers anin vo ic e fo r se rv ic es ren de red fro m Decem be r 5, 1 94 6, t o Dec em

be r 4, 1 94 7. Id . at 9 97 . The p artne rs hi p, wh ic h us edanaccrua l m etho d o f acc ou nt in g, ac cru edth e en ti re am ou ntof t he in vo ic e o n it s b oo ks forth e TYE Decem be r 31 , 19 46 , altho ug h the pa rtn ers hi p d idno t b eg in m ak in g p aym en ts on th e in vo ic e unt il Feb ru ary 10 , 19 47 . Id. The Co urt h el d tha t the partn ers hi p was no t en ti tl edto accrue th e en ti re am ountof t he in vo ic e fo r Fed eral in co m e ta x p ur po se s. Id . at 9 98 -9 99 . In s o ho ld in g, the Co urt s ta te d tha t u nd er the co ntractth e ta xp ay ers “ in cu rredno li ab il ity bu t m erel y

ag reedto be co m e li ab le to pa y inth e ev en t the futur e se rv ic es cal le d fo r were p erfo rm ed .” Id . at 9 98 . The Co urt fu rth er ac kn owl ed ge d t ha t the m eas ur e o f anob li ga ti onto pa y forfutur e se rv ic es was n otth e co nt ractpri ce b ut rathe r “ a co nt in ge ntres po ns e in da m ag es ” fo r br each of t he co nt ract . Id. at99 8- 99 9. Th e U.S. Co urt o f App eal s fo r th e Thi rdCir cu itaffi rm edth e d eci si on of t hi s Co urt, s tati ng th at“ [r]end it io n o f th e se rv ic es was aco nd it io n p rece de ntto an y ob li ga ti on of t he pa rtn ers hi p t o p ay .” Levi n v . Comm is si on er, 2 19 F.2dat 5 89
. Pet it io ne r al so cit es Am al ga m at edHou s. Co rp . v. Co m m is si on er, 3 7 4 2 B.T.A. 81 7 (1 93 8) , aff’d, 1 08 F.2d10 10 (2dCir . 19 40 ), insupp ort o f th is (co nt in ue d...)- 39 -

ex ecu ti on of aco nt ract , witho utm or e, es tabl is he s the factof t he tax pay er’s li ab il ity for th e en ti re am ou ntdu e und er the co ntract . Rath er, i n e ach of t he cit ed
cas es , th e co urt ex am in edth e rel ev an t co nt ractto de ci de when th e li ab il ity be cam e fix ed . See Co m

mis si on er v . H.B. Ives Co ., 29 7 F .2d22 9 (2 d C ir. 1 96 1) , rev ’g T.C. Mem o. 1 95 9- 18 7; W il lo ug hb y Cam era S to res , Inc . v. Co m m is si on er, 1 25 F.2 d 6 07 , 60 8- 60 9 (2 d C ir. 1 94 2) , rev ’g 44 B.T.A. 52 0 (1 94 1) ; Hel ve rin g v . Ru ss ian F in . & Co ns tr. C or p., 7 7 F .2d32 4, 3 27 (2dCir . 19 35 ); Wash . Pos t Co . v. Uni te d S tate s, 4 05 F.2d12 79 , 12 83 (Ct . Cl. 1 96 9) ; Bu rn ha m Co rp . v. Co m m is si on er, 9 0 T.C. 9 53 , 95 7- 95 8 (1 98 8) , aff’d, 8 78 F.2d86 (2dCir . 19 89 ); I ll
. Po wer Co . v. Co m

m is si on er, 8 7 T.C. 1 41 7, 1 44 3- 14 47 (19 86 ); C ha m pi onSp ark

(...co nt in ue d) 4 2 co nt en ti on . In p art ic ul ar, p et it io ne r co nt en ds th atinAm al ga m at edHou s. Co rp ., th e Co urt h el d tha t the tax pa y er’s l iabi li ty for s erv ic e p aym en ts was n otfix ed be cau se th e ta xp ay er h adno t en te redin to a bi nd in g c on tra ctwith aservi ce pr ov id er an d the servi ces were n oty etrequi redun de r St at e h ou si ng law. In Am al ga m at edHou s. Co rp . v. Co m m is si on er, 3 7 B .T.A. at 82 9, the tax pa y ers were requi redun de r St at e law to m ak e ren ov at io ns at t he en d o f parti cu lar pe rio ds of m on th s an d a cco rd in gl y

“ se t up ares erv e fro m

th e ren t re cei ve d dur in g tha t p eri od su ffi ci en t t o p ay

for ” th e ren ov at io ns . The Co urt h el d t he tax pa y ers co ul d n ot accrue th e ren ov at io n c os ts as e xp en se s b efo re the en d o f th e rel ev an t p eri od , as de fin edby Stat e la w, or the ti m e th atren ov at io n s erv ic es were re nd ered . Id. The Co urt d idno t d is cu ss th e eff ect , if an y , of the tax pa y ers ’ la ck of aservi ce co nt ract un de r whi cha th irdpa rty agre edto pro vi de ren ov at io n s erv ic es . Am al ga m at ed Hou s. Co rp . do es no t s tandforth e p ro po si ti on forwhi chitis cit edby pet it io ne r.- 40 -

Pl ug Co . v. Co m

m is si on er, 3 0 T.C. 2 95 , 29 8 (1 95 8) , aff’d, 2 66 F.2d34 7 (6 th Cir
. 19 59 ). The ci te d c as es are d is ti ng ui sh ab le as e xp la in edbe lo w. Two o f th e cas es ad dr es s the tre atm en t o f paym en ts m ad e und er a u ni la te ral
co nt ract . See Burn ha m

Co rp . v. Co m

m is si on er, 9 0 T.C. 9 53 ; Ch am pi on Sp ark 4 3 Pl ug Co . v. Co m

m is si on er, 3 0 T.C. 2 95
. The ag reem en ts at i ss ue he re ar e n ot 4 4
un il at eral ; ea chpa rty is o bl ig at edto pe rfo rm th e und ert ak in gs sp eci fie d t he rei n, an d p et it io ne r is requi redto m ak e p aym en ts ov er the term of t he co nt ractin
ex ch an ge forgo od s o r se rv ic es to be pro vi de d. Thre e o f th e cas es in vo lv e si tu at io ns wher e th e requi redpe rfo rm an ce fr om on e o f th e co nt ract in g p art ie s o ccu rredinon e ta xabl e y ear b utth e o th er co nt ract in g p arty

di d n otactua ll y

m ak e th e as so ci at edpa ym en t u nt il th e fo ll owi ng ta xabl e y ear. Will ou gh by Cam era S to res , Inc . v. Co m m is si on er, 1 25 F.2dat 6 08
- Bu rn ha m Co rp . v. Co m

m is si on er, 9 0 T.C. 9 53 (19 88 ), aff’d, 8 78 F.2d86 4 3 (2 d C ir. 1 98 9) , in vo lv eda co nt ractun de r whi chth e ta xp ay er ag reedto m ak e m on th ly paym en ts for

th e rem ai nd er o f anin di vi du al ’s li fe. The Co urt h el d t ha t th e ta xp ay er was en ti tl edto de du ctth e p res en t v al ue of t he pa ym en ts forth e en ti rety of t he co nt ractterm

inth e ta xabl e y ear i n wh ic h t he tax pa y er en te redin to th e co nt ract . Id. at95 7- 95 8. Ch am pi on Sp arkPlu g C o. v . Comm is si on er, 3 0 T.C. 2 95 , 29 7 (1 95 8) , 4 4 aff’d, 2 66 F.2d34 7 (6 th Cir . 19 59 ), in vo lv eda un il at eral co nt ractun de r whi chth e ta xp ay er ag reedto m ak e se m im on th ly paym en ts to a di sabl edform er em pl oyee fo r a m ul ti y ear p eri od . The Co urt fo un d t ha t the tax pay er was en ti tl edto de du ctth e va lu e o f th e p aym en ts to be m ad e o ve r th e en ti re p eri odinth e ta xabl e y ear i n whi chth e ta xp ay er en te redin to th e co ntract . Id. at29 8.- 41 -

60 9; Helv eri ng v. Ru ss ian F in . & Co ns tr. C or p., 7 7 F .2dat 3 27 ; Wash . Pos t Co ., 40 5 F .2dat 1 28 3. Inco nt ras t, the requi redpe rfo rm an ce u nd er the ag reem en ts to whi chth e d is pu te d d educ ti on s re la te was n otsupp os edto oc cu r, an d i n fa ctdi d
no t o ccu r, un ti l af

te r th e cl os e o f pe ti ti on er’s TYE March 31 , 20 05
. One of t he cas es , Comm is si on er v . H.B. Ives Co ., 29 7 F .2dat 2 29 -2 30 , is
no t re le va ntto th e is su es be fo re the Co urt as itin vo lv es a de du ct io n c la im edfor y ear 1 un de r a co nt ractth atwas n otex ecu te d u nt il y ear 2
. The othe r cas e p et it io ne r ci te s, Il l. Po wer Co . v. Co m m is si on er, 8 7 T.C. at 14 43 -1 44 7, ac tu al ly sup po rts res po nd en t’s ar gu m en t tha t the factof t he li ab il ity is
es tabl is he d upo n the oc curren ce o f ei th er the requi redpe rfo rm an ce o r th e p aym en t du e d at e. Ill . Powe r Co . v. Co m m is si on er, 8 7 T.C. at14 45 , in vo lv eda le as e ag reem en t u nd er wh ic h the tax pa y er ag reedto m ak e le as e p aym en ts eithe r
m on th ly, as th e ta xp ay er’s nuc le ar p owe r pl an t b ecame op erat io na l, o r atth e te rm in at io n o f th e le as e ag reem en t, wh ic h wo ul d o ccu r in 40 y ears . Id. The ta xp ay er el ect edto de fer i ts lea se pa ym en ts for19 81 un ti l the pl an t b ecame op erat io na l; ho wev er, the tax pa y er ac cru edanam ou ntequa l t o i ts m on th ly leas e ob li ga ti on for19 81 an d d educ te d t he am ou ntonit s 1 98 1 re tu rn . Id. at14 28 , 14 45
. Thi s C ou rt uph el d the cla im edde du ct io n, s ta ti ng :- 42 - Whe th er the lea se pay

m en ts are m ad e as Mo nthl y Leas e Ch arg es , as the pl an t b eco m es op erat io na l, o r as of t he term in at io n o f th e Leas e Agr eem en t, i t i s cl ear t ha t i n a ll ev en ts , th e p aym en ts m us t be m ad e. Thatpe ti ti on er el ect edto de fer p aym en ts of t he ch arg es un ti l the pl an t b eco m es op erat io na l i s o f no si gn ifi can ce. The el ect io n m erel y

affe ct s the ti m in g a ndno t the cert ai nty of p aym en t o f th e acc ru edch arg e. * * * Id . at 1 44 5. Be cau se th e le as e ag reem en t p ro vi de d t ha t the tax pa y er h adan un co nd it io na l l iabi li ty to p ay th e le as e o bl ig at io ns as t he y accrue d e ach m on th , th e Co urt h el d tha t the tax pa y er was en ti tl edto de du ctth os e o bl ig at io ns as t he y accrue d e ve n i f th e ta xp ay er d idno t p ay th e le as e o bl ig at io ns un ti l l at er. The ho ld in g i s co ns is te ntwith the ge ne ral pro po si ti onth ata ta xp ay er m ay de du cta li ab il ity as an e xp en se be fo re p aym en t i s m ad e so lo ng as t he ev en t fi xi ng th e li ab il ity (inIll . Powe r Co ., per fo rm an ce u nd er the lea se ag reem en t) h as oc cu rred
. See a ls o Eas tm anKod akCo . v. Un it edSta te s, 5 34 F.2d25 2, 2 59 -2 60 (Ct . Cl. 19 76 ). Altho ug h p et it io ne r’s ex ecu ti onof t he ag reem en ts inis su e d oe s n ot
es tabl is h the factof t he li ab il it ie s, the term s o f th e ag reem en ts are re le va ntin de ci di ng whet he r an d wh enth e li ab il it ie s b ecame fix edun de r th e al l ev en ts tes t. See s up ra p p. 3 8- 39 ; s ee al so Deci si on , Inc . v. Co m m is si on er, 4 7 T.C. 5 8 (1 96 6)
. W e an al yze ea chof t he rel ev an t ag reem en ts to id en ti fy th e ear li er o f whe n t he- 43 -

requi redpe rfo rm an ce o ccu rredor wh enpe ti ti on er’s p aym en t was un co nd it io na ll y du e. 1. Serv ic e Co nt ract s An ac cru al m etho d t ax pa y er m ay no t d educ t an ex pe ns e at tri bu tabl e to a bi la te ral servi ce co nt ractbe fo re p erfo rm an ce o f th e se rv ic es un de r th e co nt ract
oc cu rs . Nat’l Bre adWrap pi ng Mac h. Co . v. Co m m is si on er, 3 0 T.C. 5 50 , 55 6 (1 95 8) (“ The accrua l m etho d d oe s n otpe rm itth e an ti ci pa ti on of f utur e ex pe ns es pr io r to th e ren di ti on of the servi ces forwhi chth e p aym en t i s due .”); Levi n v . Co m m is si on er, 2 1 T.C. at99 8; Am al ga m at edHou s. Co rp . v. Co m m is si on er, 3 7 B.T.A. 81 7, 8 29 (19 38 ), aff’d, 1 08 F.2d10 10 (2dCir . 19 40 ); s ee al so Leve rt v . Co m m is si on er, T.C. Mem o. 1 98 9- 33 3; Rev . Rul . 80 -1 82 , 19 80 -2 C.B. 1 67
.

a. Mar sh Agre em en t The ev en t fi xi ng a li ab il ity un de r a s erv ic e co nt ractis th e p erfo rm an ce o f th e se rv ic es . See, e.g ., Levi n v . Comm is si on er, 2 1 T.C. at99 8. As rel ev an t h ere, un de r th e ag reem en t M ars h a gr eedto pro vi de VECO Cor p. wi th va rio us in su ran ce br ok erag e an d c on su lt in g s erv ic es du rin g t he pe rio d fr om Jan uary 10 th ro ug h Decem be r 31 , 20 05 , inex ch an ge for th e p aym en t b y

VECO Cor

p. o f anannu al fix edfee o f $3 00 ,00 0. Th e $ 30 0,0 00 fee was pa y ab le inin st al lm en ts with $ 75 ,00 0- 44 -

du e o n F eb ru ary 1, 2 00 5, an d fo urad di ti on al pa ym en ts , to ta li ng $2 25 ,00 0, due on da te s ei th er o n o r aft er Ap ril 1, 2 00 5. 4 5 The po rti onof t he fee i n d is pu te , $2 25 ,00 0, was no t due un de r th e ag reem en t u nt il on or a fte r Apr il 1, 2 00 5. Acco rd in gl y , th e $ 22 5,0 00 qu al ifi es as anest ab li sh edli ab il ity

du rin g p et it io ne r’s TYE March 31 , 20 05 , on ly if Mar sh pe rfo rm edth e requi redservi ces un de r th e ag reem en t o n o r be fo re Ma rch 31 , 20 05
. Pet it io ne r ha s fa il edto pro ve th atMars h p ro vi de d a ll of t he co nt ract ed -fo r se rv ic es to VECO Cor

p. b y Marc h 3 1, 2 00 5. VECO Cor

p. was requi redto m ak e a $ 75 ,00 0 p aym en t fo r se rv ic es ren de red du rin g the pe rio d J anua ry 10 to Marc h 3 1, 2 00 5, wh ic h p et it io ne r pr op erl y de du ct ed . Howev er, VECO Co rp . was n otrequi redto pay th e $ 22 5,0 00 am ou nt by March 31 , 20 05 . As th ere i s n o c red ib le ev id en ce tha t ei th er (i ) th e se rv ic es requi redun de r th e co nt ractforth e p eri odaft er March31 , 20 05 , hadbe enpro vi de d by March 31 , 20 05 , or (i i) p et it io ne r ha d a n o bl ig at io n t o p ay th e $ 22 5,0 00 be fo re Mar ch31 , 20 05 , th e fac t o f th e li ab il ity forth e $ 22 5,0 00 pe ti ti on er d educ te d was
no t es tabl is he d b y

th e cl os e o f pe ti ti on er’s TYE March 31 , 20 05
. The Mars h a gr eem en t d oe s n otpro vi de forVECO Cor p. t o m ak e p aym en ts 4 5 in equa l am ou nt s. Ho wev er, the pa ym en t s ch edul e sh ows th atVECO Cor p. was to m ak e p aym en ts of $ 75 ,00 0, o r m ul ti pl e am ount s equa l t o $ 75 ,00 0, fo r eac h qu art er. W e in fer fr om

th is pa ym en t s ch edul e th atVECO Cor p. was to m ak e pa ym en ts to Mars h a s the servi ces were p ro vi de d.- 45 - b. ACS Ag reem en t Pet it io ne r fai le d t o i nt ro du ce a c op y of t he servi ce ag reem en t b etweenACS
an d VECO Al as kaor a ny oth er ev id en ce t o s ho w th e p erfo rm an ce re qu ire d o f ACS u nd er the co nt ract . Whi le we in fer fr om th e rec or d t ha t ACS pro vi de d
se rv ic es to VECO Alas ka , we are unabl e to m ak e a fi nd in g a s t o wh ethe r pe rfo rm an ce u nd er the ACS ag reem en t h adoc cu rredby the clo se of TYE Mar ch 31 , 20 05
. W e al so in fer fr om

th e rec or d t ha t VECO Ala sk a m ad e m on th ly paym en ts to ACS. See s up ra n ot e 1 6. Th e p art ie s ag ree t ha t the di sp ut edde du ct io n i s at tri bu tabl e to m on th ly exp en se s u nd er the ag reem en t fo r th e p eri odApri l 1 to Decem be r 31 , 20 05 . At be st , paym en t o f th e ex pe ns e g en erat in g t he di sp ut ed de du ct io n was no t due un ti l the be gi nn in g o f eac h m on th an d a cco rd in gl y , was n ot
un co nd it io na ll y

du e unt il aft er Ma rch 31 , 20 05 . Peti ti on er h as fai le d t o s ho w th at th e fac t o f th e li ab il ity

was e st ab li sh edby the clo se of p et it io ne r’s TYE March 31 , 20 05
. c. Sch wam m & Frampto n Ag reem en t Und er the ag reem en t Sc hwam m & Frampto n a gr eedto pro vi de pro pe rty
m an ag em en t s erv ic es an d t o a ctas a ge ntforVECO Prop ert ie s, i n e xc ha ng e fo r
m on th ly paym en ts by V ECO Pro pe rti es th atwere due when itrece iv edren t fo r th e- 46 -

m on th . The d is pu te d d educ ti on is att rib ut ab le to ex pe ns es of $ 6,2 50 forservi ces pr ov id edby Schwamm

& Frampto n i n Ap ril 20 05 . VECO Prop ert ie s’ paym en t o f $6 ,25 0 was no t u nc on di ti on al ly due un ti l o n o r aft er Ap ril 1, 2 00 5. Neit he r th e p erfo rm an ce o f th e se rv ic es no r th e p aym en t due da te oc cu rred be fo re Ma rch 31 , 20 05 . Accor di ng ly, th e fac t o f th e li ab il ity was n otest ab li sh ed by the clo se of p et it io ne r’s TYE March 31 , 20 05
.

d. Oti s El ev at orAgre em en t Und er the ag reem en t Sc hwam m & Frampto n, as ag en t fo r VECO Pro pe rti es , ag reedto pa y

Oti s El ev at ora m on th ly serv ic e fee of $ 1,9 50
. The t erm s o f th e 4 6 ag reem en t p ro vi de d tha t p aym en ts wou ldbe m ad e qua rte rly, with eachqu art erl y pa ym en t m ad e “ on or b efo re the las t d ay of t he m on th pri orto th e b il li ng pe rio d,

Res po nd en t co nt en ds th atpe ti ti on er i s n oten ti tl edto a de du ct io n fo r 4 6 ex pe ns es un de r th e Oti s El ev at orag reem en t b ecau se : (1 ) ne ithe r VECO Co rp . no r VECO Pro pe rti es m ad e an y di rectpa ym en ts to Oti s El ev at oran d (2 ) ne ithe r VECO Cor

p. n orVECO Prop ert ie s was a pa rty to t he co nt ractwith Ot is Elev at or . Altho ug h n ei th er VECO Co rp . no r VECO Pro pe rti es m ad e an y di rectpa ym en ts to Oti s El ev at or , pet it io ne r is en ti tl edto de du ctexpe ns es attrib ut ab le to li ab il it ie s in cu rreddu rin g TYE Mar ch31 , 20 05 , su chas t he Oti s El ev at orm on th ly serv ic e fees . See, e.g ., Uni te d S ta te s v . Gen. Dyna m ic s C or p., 4 81 U.S. 23 9, 2 43 (19 87 ); Uni te d S tate s v . Hug he s Pr op s., In c., 47 6 U.S. 5 93 , 59 9 (1 98 6) . In ad di ti on , whi le ne ithe r VECO Co rp . no r VECO Pro pe rti es was apa rty to t he Oti s El ev at or ag reem en t, Sc hwa m

m & Frampto n, the ag en t o f VECO Pro pe rti es , ent eredin to th e Oti s El ev at orag reem en t atth e d ire ct io n o f VECO Pro pe rti es .- 47 -

be gi nn in g o n the Co m

m en cem en t Dat e.” The ag reem en t fu rth er p ro vi de d fo r a co m m en cem en t d at e o f Feb ru ary 1, 2 00 2. The di sp ut edde du ct io n, $ 16 ,57 5, was att rib ut ab le to ex pe ns es un de r th e Oti s El ev at orag reem en t fo r th e p eri odApri l 1 to Decem be r 15 , 20 05 . There fo re, pe ti ti on er’s l iabi li ty for the am ountwas fi xe d o nl y if p aym en t o f th atam ou ntwas un co nd it io na ll y

du e o n o r be fo re Ma rch 31 , 20 05
. Und er the ag reem en t VECO Pro pe rti es was re qu ire d t o m ak e qua rte rly pa ym en ts on or b efo re J anua ry 31 , Apri l 3 0, J ul y

31 , andOcto be r 31 . The adva nc e p aym en t due on or b efo re J anua ry 31 , 20 05 , was fo r se rv ic es to be
ren de reddu rin g F eb ru ary, Marc h, an d Ap ril 20 05 . VECO Prop ert ie s was no t requi redto m ak e an ot he r pa ym en t u nt il Apri l 3 0, 2 00 5, atwhi chti m e VECO Pro pe rti es wou ldpa y

forservi ces to be ren de reddu rin g M ay , Ju ne , andJu ly 200 5. Bec au se th e o bl ig at io n t o p ay forth e se rv ic es to be ren de reddurin g Ap ril 20 05 was u nc on di ti on al ly due onJan ua ry 31 , 20 05 , $1 ,95 0 o f th e d is pu te d

4 7 de du ct io n, at tri bu tabl e to servi ces pro vi de d i n Ap ril 20 05 , was fi xe d dur in g pe ti ti on er’s TYE March 31 , 20 05 . See, e.g ., sec . 1.4 46 -1 (c)( ii )(B) , Inc om e Tax

Pet it io ne r is no t en ti tl edto tre atth is li ab il ity as i nc urredan y

earl ie r th an 4 7 th e ta xabl e y ear i n wh ic h e co no m ic pe rfo rm an ce o ccu rs . See s ec. 4 61 (h )(1 ); s ec. 1.4 61 -4 (a)( 1) , Inc om e Tax Reg s. We di sc us s the eco no m ic pe rfo rm an ce requi rem en t wi th res pe ctto th is li ab il ity inpart I I.C, in fra.- 48 -

Reg s. Th e rem ai ni ng di sp ut edam ou ntatt rib ut ab le to servi ces pro vi de d fr om May 1 t o Dec em

be r 15 , 20 05 , ho wev er, was no t fi xe d dur in g TYE Mar ch31 , 20 05 , be cau se paym en t fo r su chservi ces was n otun co nd it io na ll y du e unt il aft er Ma rch 31 , 20 05
. e. Q-1 Agre em en t Und er the ag reem en t Q-1 ag reedto pro vi de m ai nt en an ce s erv ic es to VECO Pro pe rti es an d VECO Pro pe rti es ag reedto pa y Q-1 am on th ly fee of $ 9,9 84 “ in
arre ars , onth e te nt h d ay

of t he fol lo win g m on th .” The d is pu te d d educ ti on , $5 9,9 40 , rel at es to ex pe ns es in cu rredun de r th e Q-1 ag reem en t fo r se rv ic es pr ov id eddu rin g the pe rio d Ap ril 1 t o Oct ob er 1 5, 2 00 5. Nei th er the pe rfo rm an ce of th e se rv ic es no r th e p aym en t due date oc cu rredbe fo re the clo se of p et it io ne r’s ta xabl e y ear. Acco rd in gl y , th e fac t o f th e li ab il ity was n otest ab li sh edby the clo se of pe ti ti on er’s TYE March 31 , 20 05
.

2. In su ran ce Pr em iu m Agre em en t Fo r pu rp os es of t he all ev en ts tes t, the de du ct ib il ity of e xp en se s u nd er an in su ran ce co nt ractge ne ral ly is re vi ewedinth e sa m e m an ne r as th e d educ ti bi li ty of
ex pe ns es un de r a s erv ic e co nt ract . See, e.g ., Rev . Rul . 20 07 -3 , supr a. Und er VECO Cor

p.’s co m m erci al pre m iu m

fin an ce ag reem en t wi th Mars h, VECO Co rp . ag reedto m ak e m on th ly prem iu m pa ym en ts be gi nn in g M ay 1, 2 00 5, fo r co ve rag e- 49 -

du rin g the pe rio d Ap ril 1, 2 00 5, t o M arch 31 , 20 06
. Perfo rm an ce o f th e se rv ic es 4 8 di d n otoc cu r an d p aym en t fo r th e se rv ic es was n otdu e b efo re Ma rch 31 , 20 05
. Acco rd in gl y , th e fac t o f th e li ab il ity was n otest ab li sh edby the clo se of pe ti ti on er’s TYE March 31 , 20 05
.

3. Equ ip m en t an d R eal Est at e Ren ta l Ag reem en ts The factof t he li ab il ity

of aren ta l ex pe ns e is est ab li sh edas e ach ren t pa ym en t b eco m es du e. Co ns ol . Foo ds Co rp . v. Co m m is si on er, 6 6 T.C. 4 36 , 44 3 (1 97 6) ; s ee al so Ro d R eal ty Co. v. Co m m is si on er, T.C. Mem o. 1 96 7- 49 . Und er al l o f th e rea l es ta te ren ta l l eas es , with t he ex cep ti on of t he Bay Streetlea se , VECO Cor

p. o r it s s ub si di ari es ag reedto m ak e a ren t p aym en t fo r eac h m on th ly
ren ta l p eri odeit he r: (1 ) on th e fi rs t d ay of t ha t m on th or ( 2) “ on or b efo re” t he fir stda y of t ha t m on th . The d is pu te d d educ ti on s at tri bu tabl e to th es e le as es rel at e to th e ren ta l o f pr op erty

on or a fte r Apr il 1, 2 00 5. Un de r th e le as e ag reem en ts th e ren t p aym en ts for

Apri l 2 00 5 wer e n otun co nd it io na ll y du e unt il Apri l 1 , 20 05 , an d the ren t p aym en ts forth e rem ai nd er o f 20 05 were n otdu e unt il aft er Ap ril 1,

As n ot edsupr a p p. 3 7- 39 , th e m ere e xe cu ti on of aco nt ractis in su ffi ci en t 4 8 to est ab li sh th e fac t o f th e ta xp ay er’s l iabi li ty. Acco rd in gl y , pet it io ne r m ay no t rel y on th e ex is te nc e o f th e in su ran ce p rem iu m co nt ractto supp ort i ts cla im ed de du ct io n. Fu rth erm or e, VECO Cor p. d idno t en te r in to th e in su ran ce p rem iu m co nt ractun ti l Ap ril 28 , 20 05 , aft er the clo se of p et it io ne r’s TYE March 31 , 20 05
.- 50 -

20 05 . Accor di ng ly, th e fac t o f th es e li ab il it ie s was no t es tabl is he d b y th e cl os e o f pe ti ti on er’s TYE March 31 , 20 05
. Und er the Bay Streetlea se VECO USA agre edto m ak e m on th ly rent al pa ym en ts inadva nc e o f th e fi rs t d ay of e ach m on th . The d is pu te d d educ ti on , $2 94 ,69 6, i s at tri bu tabl e to th e ren ta l p eri odApri l 1 to Decem be r 15 , 20 05
. VECO USA’ s re ntpa y

m en t fo r Apr il 20 05 was due on or b efo re Ma rch 31 , 20 05
. Acco rd in gl y , th e fac t o f th e li ab il ity forth e $ 33 ,99 0 re ntpa y

m en t fo r th e p eri od Apr il 20 05 was e st ab li sh edbe fo re the clo se of p et it io ne r’s TYE March 31 , 20 05 , be cau se th e ren t p aym en t was un co nd it io na ll y du e o n M arch 31 , 20 05
. See, e.g ., 4 9
se c. 1.4 46 -1 (c)( ii )(B) , Inc om e Tax Reg s. Pet it io ne r is no t en ti tl edto de du ctan y am ountatt rib ut ab le to ren t fo r th e p eri odMay 1 to Decem be r 15 , 20 05 , bec au se th e ren t p aym en ts were n otdu e unt il aft er the clo se of p et it io ne r’s TYE March 31 , 20 05 . There fo re, the factof p et it io ne r’s li ab il ity for th es e p aym en ts was n ot
es tabl is he d dur in g p et it io ne r’s TYE March 31 , 20 05
. Und er the IKON equ ip m en t l eas e VECO Serv ic es ag reedto m ak e m on th ly
ren t p aym en ts of $ 25 ,78 5, wi th th e fi rs t p aym en t due on or b efo re the effe ct iv e
Pet it io ne r is no t en ti tl edto tre atth e am ou ntof t hi s l iabi li ty as in curredan y 4 9 earl ie r th anth e ta xabl e y ear i n wh ic h e co no m ic pe rfo rm an ce o ccu rs . See s ec. 46 1( h) (1 ); s ec. 1 .46 1- 4( a)(1 ), In co m e Tax Reg s. We di sc us s the eco no m ic pe rfo rm an ce re qu ire m en t wi thres pe ctto th is li ab il ity in fra p artII.C.- 51 -

da te an d the rem ai ni ng pa ym en ts du e o n t he same day each m on th th erea fte r. Pet it io ne r ha s fa il edto in tro du ce ev id en ce t o p ro ve th e eff ect iv e d at e o f th e IKON equi pm en t l eas e. See s up ra n ot e 3 2. Acco rd in gl y , we are u nabl e to fin d t ha t the
ren t p aym en ts for

whi chth e d is pu te d d educ ti on was c la im edwere due onor be fo re Ma rch 31 , 20 05 . Peti ti on er h as fai le d t o p ro ve th atth e fac t o f it s l iabi li ty
un de r th e IKON equi pm en t l eas e was est ab li sh edby the clo se of p et it io ne r’s TYE Mar ch31 , 20 05
. C. Eco no m ic Perfo rm an ce an d t he Recu rri ng Ite m Exce pt io n 1. In tro du ct io n Sect io n 4 61 (h )(1 ) pr ov id es th at“ inde te rm in in g wh ethe r anam ou ntha s be enin cu rredwith re sp ectto an y it em du rin g a ny tax ab le y ear, the all ev en ts tes t sh al l n otbe tre at edas m etan y earl ie r th anwheneco no m ic pe rfo rm an ce wi th
res pe ctto su chit em

oc cu rs .” If th e li ab il ity is att rib ut ab le to th e p ro vi si on of 5 0
se rv ic es or p ro pe rty to t he tax pa y er b y an ot he r pe rs on , eco no m ic pe rfo rm an ce oc cu rs as t he pe rs on pro vi de s s uc h s erv ic es or p ro pe rty. Sec. 46 1( h) (2 )(A)(i ) an d (ii ); s ee al so sec . 1.4 61 -4 (d )(2 ), In co m e Tax Reg s. If the li ab il ity is att rib ut ab le to

“ th e u se of p ro pe rty by

th e ta xp ay er, eco no m ic pe rfo rm an ce o ccu rs as the tax pa y er Sec. 1 .46 1- 1( a)(2 )(i ii )(B) , Inc om e Tax Reg s., p ro vi de s ex am pl es of 5 0 li ab il it ie s tha t ar e n otsubjec t t o t he eco no m ic pe rfo rm an ce re qu ire m en t, n on e o f whi chis rel ev an t h ere. Se e se c. 1.4 61 -4 (b ), In co m e Tax Reg s.- 52 -

us es su chpro pe rty.” Sec. 4 61 (h )(2 )(A)(i ii ); s ee al so sec . 1.4 61 -4 (d )(3 ), In co m e 5 1 Tax Reg s. Ho wev er, “ a ta xp ay er i s p erm it te d t o t reatservi ces or p ro pe rty as pr ov id edto th e ta xp ay er as th e ta xp ay er m ak es paym en t t o t he pe rs on pro vi di ng th e se rv ic es or p ro pe rty * * * if the tax pay er ca n re as on ab ly exp ectth e p ers on to pr ov id e th e se rv ic es or p ro pe rty with in 3-1 /2 -m on th s af te r th e d at e o f pa ym en t.” Sec. 1 .46 1- 4( d) (6 )(i i), In co m e Tax Reg s. Pet it io ne r ha s co nc ed edth atitdi d n ot
sa ti sf y th e 3 -1 /2 -m on th rul e o f se ct io n 1 .46 1- 4( d) (6 )(i i), In co m e Tax Reg s., fo r an y of t he de du ct io ns inis su e. 5 2

The eco no m ic pe rfo rm an ce p rin ci pl es rel at in g t o t he pro vi si on of s erv ic es 5 1 orpro pe rty to the tax pa y er, o r th e u se of p ro pe rty by th e ta xp ay er, d o n otap pl y to cert ai n l iabi li ti es , in cl ud in g, am on g o th er thi ng s, i nt eres t ex pe ns es an d l iabi li ti es ari si ng un de r a wo rk er’s co m pe ns at io n a ctor o utof a ny tort o r br each of c on tra ct cl ai m . See s ec. 1 .46 1- 4( d) (1 ), In co m e Tax Reg s. Sec. 4 61 (h ) al so pro vi de s a g en eral rul e fo r eco no m ic pe rfo rm an ce, 5 2 de sc rib edsupr a p . 33 . Und er the ge ne ral rul e, pe ti ti on er i s en ti tl edto de du ctfor TYE March 31 , 20 05 , th e p aym en ts itm ad e dur in g t ha t year for servi ces actua ll y pe rfo rm edan d p ro pe rty actu al ly recei ve d dur in g t ha t year. See, e.g ., Calt ex Oil Ven ture v . Comm is si on er, 1 38 T.C. 18 , 38 (20 12 ). The o nl y am ou nt s i n d is pu te are t ho se att rib ut ab le to de du ct io ns pe ti ti on er cl ai m edonit s TYE Mar ch31 , 20 05 , return fo r se rv ic es pe rfo rm edan d p ro pe rty recei ve d a fte r Mar ch31 , 20 05
. Acco rd in gl y , eco no m ic pe rfo rm an ce wi th res pe ctto th e p orti on s o f th e d educ ti on s in di sp ut e d idno t o ccu r un ti l af te r th e cl os e o f pe ti ti on er’s TYE March 31 , 20 05
. See s ec. 4 61 (h )(2 )(A).- 53 -

Sect io n 4 61 (h )(3 ) pr ov id es anex cep ti on (th e rec urrin g i te m ex cep ti on ) to th e g en eral rul e requi rin g e co no m ic pe rfo rm an ce. Und er the recu rri ng it em ex cep ti on , a tax pa y er m ay tre atanit em

as i nc urreddu rin g a ny tax ab le y ear i f: (i) th e al l ev en ts tes t wi th res pe ctto su chit em is m etdurin g su chtax ab le y ear ( de te rm in edwitho utreg ardto * * * [s ect io n 46 1( h) (1 )]), (ii ) eco no m ic pe rfo rm an ce wi th res pe ctto su chit em oc cu rs withi n the sh orte r of

-- (I) a rea so nabl e p eri odaft er the clo se of s uc h t ax ab le y ear, o r (II) 8 1 /2 m on th s af

te r th e cl os e o f su chtax ab le y ear, (ii i) su chit em

is recu rri ng innature an d the tax pa y er co ns is te nt ly treat s i te m s o f su chki ndas i nc urredinth e ta xabl e y ear i n whi chth e requi rem en ts of c laus e (i ) are m et , and (iv ) ei th er-- (I) su chit em

is no t a m at eri al it em , or (II) th e acc ru al of s uc h i te m inth e ta xabl e y ear i n whi chth e requi rem en ts of c laus e (i ) are m etres ul ts ina m or e pr op er m at chag ai ns t i nc om e th anaccrui ng su chit em inth e ta xabl e y ear i n wh ic h e co no m ic pe rfo rm an ce o ccu rs . Sec. 4 61 (h )(3 )(A); see als o s ec. 1 .46 1- 5, In co m e Tax Reg s. Res po nd en t co nt en ds th atpe ti ti on er fa il edto sat is fy th e eco no mic pe rfo rm an ce re qu ire m en t an d the m at eri al ity or m at ch in g re qu ire m en t o f th e- 54 -

recu rri ng it em

ex cep ti on forall of t he di sp ut edde du ct io ns . Peti ti on er d is ag rees . Inpa rti cu lar, pe ti ti on er co nt en ds th ateco no m ic pe rfo rm an ce wi thres pe ctto each
ex pe ns e it em

oc cu rredwithi n 8 -1 /2 m on th s af te r th e cl os e o f it s TYE Mar ch31 , 20 05 , as s pe ci fie d i n s ect io n 4 61 (h )(3 )(A)(i i)( II), an d t ha t ea chex pe ns e it em is no t
m at eri al withi n the m ean in g o f se ct io n 4 61 (h )(3 )(A)(i v) (I). Pet it io ne r co nc ed es th atitdi d n otsat is fy

th e m at ch in g re qu ire m en t fo r any of t he di sp ut edde du ct io ns , with the ex cep ti onof i ts in su ran ce p rem iu m ex pe ns e d educ ti on . The de du ct io ns rem ai ni ng at i ss ue are the de du ct io ns cla im edwith re sp ect to th e Asp en , Prim av era, Su rv ey or ’s Exch an ge , andInv en sys ag reem en ts , andth e de du ct io ns cla im edwith re sp ectto servi ces an d p ro pe rty pro vi de d t o p et it io ne r du rin g Ap ril 20 05 un de r th e Oti s El ev at orag reem en t an d t he Bay Streetlea se . W e ex am in e th e rec or d t o s ee wh ethe r pe ti ti on er h as pro ve n t ha t: (1) each it em in di sp ut e is no t m at eri al , see sec . 46 1( h) (3 )(A)(i v) (I), an d/ or(2) eco no m ic pe rfo rm an ce wi th res pe ctto each it em indi sp ut e o ccu rredwithi n t he sh orte r of a reas on ab le pe rio d a fte r th e cl os e o f pe ti ti on er’s TYE March 31 , 20 05 , or wi th in 8- 1/ 2 m on th s af

te r th e cl os e o f pe ti ti on er’s TYE March31 , 20 05 , see sec . 46 1( h) (3 )(A)(i i).- 55 - 2. Mat eri al ity

Requi rem en t Inm ak in g ade te rm in at io n re ga rd in g t he m at eri al ity of a n i te m

un de r se ct io n 46 1( h) (3 )(A)(i v) , th e tr eat m en t o f anit em on fin an ci al st at em en ts sh al l b e ta ke n in to acco un t. Sec . 46 1( h) (3 )(B) . Sect io n 1 .46 1- 5( b) (4 ), In co m e Tax Reg s., al so ad dr es se s the m at eri al ity

requi rem en t an d p ro vi de s the fol lo win g g en eral

5 3 pr in ci pl es : (i) In d et erm in in g wh ethe r a l iabi li ty is m at eri al , con si de rat io n sh al l b e g iv ento th e am ou ntof t he li ab il ity inab so lu te term s an d i n rel at io n t o the am ou ntof o th er i te m s o f in co m e an d e xp en se at tri bu tabl e to th e sa m e act iv ity . (ii ) A li ab il ity

is m at eri al if i t i s m at eri al forfin an ci al st at em en t pu rp os es un de r ge ne ral ly accep te d a cco un ti ng pri nc ip le s. (ii i) A l iabi li ty tha t i s i m

m at eri al forfin an ci al st at em en t pu rp os es un de r ge ne ral ly accep te d a cco un ti ng pri nc ip le s m ay be m at eri al for

pu rp os es of t hi s p arag rap h * * * W e g le anfro m

th es e p rin ci pl es th atalt ho ug h ali ab il ity is m at eri al forpu rp os es of th e rec urrin g i te m

ex cep ti on if i t i s m at eri al forfin an ci al st at em en t p ur po se s, a li ab il ity th atis no t m at eri al forfin an ci al st at em en t p ur po se s m ay

st il l b e m at eri al The Fin an ci al Sta nd ard s Acc ou nt in g B oa rd(FASB) de fin es m at eri al ity as 5 3
“ [t]he m ag ni tu de of a n o m is si on or m is st at em en t o f acc ou nt in g i nf orm at io n t ha t, i n th e li gh t o f su rro un di ng cir cum st an ces , m ak es itpro babl e th atth e jud gm en t o f a reas on ab le pe rs on rel y in g o n the in fo rm at io n wo ul d h av e b eench an ge d o r in flu en cedby the om is si on or m is st at em en t.” St at em en t o f Fi na nc ia l Acc ou nt in g Co nc ep ts No. 2 , “ Qua li ta ti ve Ch arac te ris ti cs of Ac co un ti ng Inf orm at io n” (19 80 ) (SFAC No. 2 ).- 56 -

fo r pu rp os es of t he recu rri ng it em ex cep ti on . See, e.g ., Uni te d S ta te s v . Sto ve r, 73 1 F . Sup p. 2 d 8 87 , 89 2 (W.D. Mo. 2 01 0) , aff’d, 6 50 F.3d10 99 (8t h C ir. 2 01 1)
. 5 4 Sect io n 4 61 do es no t d efi ne when anit em is m at eri al un de r th e rec urrin g it em ex cep ti on ; i t s im

pl y pro vi de s tha t i n d et erm in in g m at eri al ity , an i te m ’s tre atm en t o n fi nanc ia l s ta te m en ts m us t b e ta ke n i nt o a cco un t. Sec . 46 1( h) (3 )(B)
. The leg is la ti ve hi st ory

acco m pa nyin g t he en act m en t o f th e rec urrin g i te m ex cep ti on , ho wev er, p ro vi de s an ex am pl e o f ho w th e m at eri al ity of a n i te m

sh ou ld be an al yzed : Fo r ex am pl e, as su m e th ata cal en da r-y ear t ax pay er en te rs in to a on ey ear m ai nt en an ce co nt racton Ju ly 1, 19 85 . If th e am ou ntof t he ex pe ns e is pro rat edbe twee n 1 98 5 a nd19 86 forfin an ci al st at em en t pu rp os es , itals o s ho ul d b e p ro rat edfortax pu rp os es . If, ho wev er, the fu ll am ou ntis de du ct edin19 85 forfin an ci al st at em en t p ur po se s be cau se itis no t m at eri al un de r ge ne ral ly accep te d a cco un ti ng pr in ci pl es , itm ay

(orm ay no t) b e co ns id eredanimm at eri al it em for pu rp os es of t hi s ex cep ti on .

A li ab il ity

als o i s m at eri al if i t i s s ig ni fic an t i n am ou nt . See s ec. 1 .46 1- 5 4 5( b) (4 )(i ), In co m e Tax Reg s.; see als o Un it edSta te s v . Sto ve r, 73 1 F . Sup p. 2 d 88 7, 8 92 (W .D. Mo. 2 01 0) (an al yzi ng th e am ou ntof t he ex pe ns e, th e rel at io ns hi p be twee n the ex pe ns e an d the tax pa y er’s rev enue , andth e m at eri al ity of t he am ou nt an d n atur e o f th e ex pe ns e fo r fi na nc ia l s ta te m en t p ur po se s i n d eci di ng whet he r an ex pe ns e was m at eri al un de r se c. 46 1( h) (3 )(A)(i v) (I)), a ff’d, 6 50 F.3d10 99 (8t h Ci r. 20 11 ); R ev . Rul . 20 12 -1 , 20 12 -2 I.R.B. 2 55 . Howev er, the FASB h as st at ed th at“ [m ]agn itud e b y

it se lf, wi th ou t re ga rdto th e n atur e o f th e it em an d the ci rcu m st an ces inwhi chth e jud gm en t h as to be m ad e, wil l n otge ne ral ly be a su ffi ci en t b as is fora m at eri al ity jud gm en t.” SF AC No. 2
.- 57 -

H.R. Co nf

. Rep t. No . 98 -8 61 , at 8 74 (19 84 ), 19 84 -3 C.B. (Vo l. 2 ) 1, 1 28 ; s ee al so St aff o f J. Co m

m . onTaxa ti on , Gene ral Exp lana ti on of the Rev enue Pro vi si on s o f th e Defi ci t Re du ct io n Actof 1 98 4, at26 3 (J . Comm . Prin t 1 98 4) . W e draw fro m se ct io n 4 61 (h )(3 )(B) an d fr om th e ex am pl e a co nc lu si on : If atax pa y er p ro rat es a li ab il ity ari si ng un de r a co nt ractov er two o r m or e ta xabl e y ears forfin an ci al st at em en t p ur

po se s b uttak es anin co ns is te ntpo si ti on onit s t ax returns , th e li ab il ity is m at eri al
. Pet it io ne r pr ep aredit s fi nanc ia l s ta te m en ts inacco rd an ce wi thGAAP. On it s fi na nc ia l s ta te m en ts pe ti ti on er ac cru edit s l iabi li ti es un de r th e Asp en , Pri m av era, Su rv ey or ’s Exch an ge , Inv en sys, an d Ot is Elev at orag reem en ts an d the Bay Streetlea se ov er m or e th anon e y ear fo r fi na nc ia l s ta te m en t p ur po se s. Onit s FYE Marc h 3 1, 2 00 6, fi nanc ia l s ta te m en t, p et it io ne r tr eat edth e d is pu te d de du ct io ns as e xp en se s fo r th aty ear b utde du ct edth e ex pe ns es onit s t ax return fo r TYE March 31 , 20 05 . Gui de d b y sec ti on 46 1( h) (3 )(B) an d t he ex am pl e in th e co nf eren ce re po rt, we c on cl ud e th atth e li ab il it ie s g iv in g ri se to th e d is pu te d de du ct io ns are m at eri al be cau se pe ti ti on er p ro rat edth e li ab il it ie s b etweentwo y ears on it s fi na nc ia l s ta te m en ts an d t oo k a n i nc on si st en t p os it io n wi th res pe ctto th e li ab il it ie s fo r fi na nc ia l s ta te m en t an d t ax rep orti ng pu rp os es .- 58 -

Pet it io ne r be ars th e b ur de n o f sh owi ng th atth e li ab il it ie s at tri bu tabl e to th e di sp ut edde du ct io ns are n otm at eri al un de r se ct io n 1 .46 1- 5( b) (4 ), In co m e Tax Reg s. Altho ug h p et it io ne r co nt en ds th atth e li ab il it ie s wer e n otm at eri al inam ou nt fo r fi na nc ia l s ta te m en t p ur po se s, p et it io ne r on ly intro du cedcal cu la ti on s tha t
co m pa re the di sp ut edde du ct io ns to gro ss rece ip ts . Peti ti on er n ei th er o ffer edan y an al y si s re ga rd in g h ow the li ab il it ie s atis su e co m pa redinam ou ntor r el at iv e im po rta nc e to si m il ar ty

pe s o f ex pe ns es no r ad dr es se d t he factth atth e d is pu te d de du ct io ns res ul te d fr om

a reque st edch an ge inacco un ti ng m etho d. 5 5 Eve n i f we were t o fi ndth atth e am ountof t he li ab il it ie s was im m at eri al for fin an ci al st at em en t p ur

po se s, “ [a] liabi li ty that i s i m m at eri al for

fin an ci al st at em en t p ur

po se s u nd er g en eral ly accep te d a cco un ti ng pri nc ip le s m ay be
m at eri al ” fo r pu rp os es of t he recu rri ng it em ex cep ti on . See s ec. 1 .46 1- 5( b) (4 )(i ii ), In co m e Tax Reg s. Th e d is pu te d i te m s re su lt edfro m a ch an ge of a cco un ti ng Add it io na ll y , th e FASB h as no te d tha t an it em th atis to o s m al l i n a m ou nt 5 5 to be co ns id eredm at eri al m ay be m at eri al if i t ar is es inab no rm al cir cu m st an ces . SFAC No . 2. The li ab il it ie s i n d is pu te aro se inab no rm al cir cu m st an ces , i.e., du rin g the y ear i n wh ic h p et it io ne r pr op os eda ch an ge init s ac co un ti ng m etho d. Pet it io ne r’s tre atm en t o f th e li ab il it ie s fo r ta x p ur po se s al so sh ows ab no rm al ci rcu m st an ces gi ve n tha t: (1) pe ti ti on er d idno t treatth e li ab il it ie s the same way fo r fi na nc ia l s ta te m en t p ur po se s an d (2 ) pe ti ti on er’s treat m en t o f th e li ab il it ie s as ex pe ns es forit s TYE Mar ch31 , 20 05 , do es no t re su ltina m at ch in g o f in co m e an d ex pe ns es si nc e p et it io ne r di d n otacce le rat e th e in co m e at tri bu tabl e to th e acce le rat edex pe ns es .- 59 -

m etho d, wh ic h was di sc lo se d o n p et it io ne r’s fin an ci al st at em en t, an d t he di sp ut ed it em s wer e tr eat edin co ns is te nt ly for fi na nc ia l ac co un ti ng an d t ax rep orti ng pu rp os es . In ad di ti on , th e li ab il it ie s g iv in g ri se to th e d educ ti on s wer e acc ru ed
ov er m or e th anon e ta xabl e y ear. Un de r th es e ci rcu m st an ces , th e li ab il it ie s ge ne rat in g the acce le rat edde du ct io ns were m at eri al fortax pu rp os es . Pet it io ne r ha d the bu rd enof p ro vi ng th atth e d is pu te d i te m s wer e n ot
m at eri al withi n the m ean in g o f se ct io n 4 61 (h )(3 )(A)(i v) (I) an d s ect io n 1 .46 1- 5( b) (4 ), In co m e Tax Reg s., an d i t d idno t d o s o. Acco rd in gl y , we ho ldth at pe ti ti on er m ay

no t u se th e rec urrin g i te m ex cep ti on to accrue an d d educ t i ts li ab il it ie s u nd er the Asp en , Prim av era, Su rv ey or ’s, Inv en sys, an d Ot is Elev at or ag reem en ts , or i ts li ab il ity un de r th e Bay Stree t l eas e, fo r pe rio ds aft er Ma rch 31 , 20 05 , onpe ti ti on er’s in co m e ta x re tu rnforTYE March 31 , 20 05 . In the li gh t o f
ou r ho ld in g, we n eedno t co ns id er wh ethe r th e o th er re qu ire m en ts of t he recu rri ng it em ex cep ti on de sc rib edinsec ti on 46 1( h) (3 )(A) h av e b eenm et . III. Co nc lu si on Bec au se ne ithe r th e requi redpe rfo rm an ces no r th e p aym en t due da te s wi th
res pe ctto th e m ajor ity

of t he acce le rat edde du ct io ns oc cu rredbe fo re the clo se of pe ti ti on er’s TYE March 31 , 20 05 , pet it io ne r fai le d t o s at is fy th e fi rs t re qu ire m en t of th e al l ev en ts tes t o f se ct io n 4 61 ; i .e., pet it io ne r fai le d t o p ro ve th atall of t he- 60 -

ev en ts ha d o ccu rredto est ab li sh th e fac t o f th e li ab il it ie s u nd er s ect io n 1 .46 1- 1( a)(2 )(i ), In co m e Tax Reg s. With res pe ctto th e rem ai ni ng acce le rat ed de du ct io ns , pet it io ne r di d n otsat is fy all of the requi rem en ts for th e rec urrin g i te m ex cep ti on un de r se ct io n 4 61 (h )(3 ) an d, co ns eque nt ly, is no t ex cep te d fr om th e ge ne ral rul e o f se ct io n 4 61 (h )(1 ) requi rin g e co no m ic pe rfo rm an ce, b ecau se th e li ab il it ie s u nd erl y in g the de du ct io ns were p ro rat edov er m or e th anon e ta xabl e y ear, wer e tr eat edin co ns is te nt ly for fi na nc ia l s ta te m en t an d t ax pu rp os es , and
were m at eri al it em s fo r ta x p ur po se s wi th in th e m ean in g o f se ct io n 46 1( h) (3 )(A)(i v) (I). See sec . 1.4 61 -5 (b )(4 ), In co m e Tax Reg s. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor
res po nd en t.