Opinion ID: 522954
Heading Depth: 2
Heading Rank: 2

Heading: The All Events Test

Text: 9 The Internal Revenue Code provides a deduction for all interest paid or accrued within the taxable year on indebtedness. 26 U.S.C. Sec. 163(a) (1982). The all events test establishes the standard for determining when an item of expense is to be regarded as accrued for federal taxation purposes. Under the test, an expense may be accrued in the year in which all the events    occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. United States v. Anderson, 269 U.S. 422, 441, 46 S.Ct. 131, 134, 70 L.Ed. 347 (1926). 6 Deductions are allowable when all the events have occurred which establish the fact of the liability giving rise to such deduction, and no accrual shall be made in any case in which all of the events have not occurred which fix the liability. Treas. Reg. Secs. 1.446-1(c)(1)(ii), 1.461-1(a)(2) (1988). 10 Establishment of the fact of liability turns on whether the taxpayer has incurred a fixed, definite, and unconditional obligation to pay. Discussing when a liability becomes fixed and certain, the Supreme Court has stated that  'a liability does not accrue as long as it remains contingent.'  United States v. Hughes Properties, Inc., 476 U.S. 593, 600, 106 S.Ct. 2092, 2096, 90 L.Ed.2d 569 (1986) (quoting Brown v. Helvering, 291 U.S. 193, 200, 54 S.Ct. 356, 360, 78 L.Ed. 725 (1934)). Accrual of an expense may not be predicated on the probability that a legal obligation to pay will arise at some point in the future. See United States v. General Dynamics Corp., 481 U.S. 239, 243-44, 107 S.Ct. 1732, 1735-36, 95 L.Ed.2d 226 (1987). Where an accrual basis taxpayer's obligation to pay interest is contingent upon the happening of a subsequent event, the interest is not accrued until the contingent liability becomes absolute, and the deduction must be taken in the year the interest is paid. Burlington-R.I.R.R. v. United States, 321 F.2d 817, 818-19 (5th Cir.1963) (citations omitted), cert. denied, 377 U.S. 943, 84 S.Ct. 1349, 12 L.Ed.2d 306 (1964). 11 Furthermore, when an accrual basis taxpayer contests the existence of a liability which might otherwise accrue, a deduction is not permitted because the existence of the contest renders the liability contingent. Dixie Pine Prods. Co. v. Commissioner, 320 U.S. 516, 519, 64 S.Ct. 364, 365, 88 L.Ed. 270 (1944). This contested liability rule is actually nothing more than the application of the all events test to a common fact pattern. See United States v. Consolidated Edison Co., 366 U.S. 380, 385-86, 81 S.Ct. 1326, 1329-30, 6 L.Ed.2d 356 (1961).