Mere execution of service of insurance contract does not satisfy all-events test.

• Author: Godshalk, Rich
• Position: ACCOUNTING METHODS & PERIODS

Rev. Rul. 2007-3 holds that the mere execution of a service or insurance contract by an accrual method taxpayer/payor (TP) does not satisfy the all-events test for incurring a liability.

Example: A, a calendar-year, accrual-method TP, contracts with an accounting firm for 2006 tax return preparation services in December 2006. No tax services are provided to A in 2006, nor is payment due or made; instead, the tax services are provided in A's 2007 tax year. According to Rev. Rul. 2007-3, the tax service expense is not deductible by A for its 2006 tax year.

An automatic change in accounting method to comply with Rev. Rul. 2007-3 is provided in Rev. Proc. 2007-14. The automatic change procedure applies to affected taxpayers that are not under examination or that are under examination and file within a window period (the 90-day or 120-day window). Rev. Proc. 2007-14 is effective for tax years ending on or after December 31, 2006.

Rev. Rul. 2007-3 potentially affects clients that are deducting (1) service expenses prior to performance or payment being made or due (which may be consistent with their financial statement reporting method) or (2) insurance expenses for the tax year of contract execution, where the tax year precedes the tax year of insurance coverage, premium payment, and premium payment due date.

All-Events Test for Service and Insurance Liabilities

Rev. Rul. 2007-3 provides that all the events have occurred that establish the fact of a liability for service and insurance liabilities upon the earlier of (1) the occurrence of the event fixing the liability, whether that be the required performance or other event, or (2) the date payment is due.

The ruling presents two factual situations, one involving the provision of services and the other the provision of insurance. As described in the revenue ruling, the TP, which uses the accrual method and employs a calendar tax year, enters into service and insurance agreements in December 2006. In both situations, payment of the expense is not due or made until January 2007, and, in both situations, contractual performance by the taxpayer's payee does not occur until 2007. Performance with regard to the service agreement means the payee's rendering of the services, and, with respect to insurance, it is insurance coverage. Thus, in both situations, the only event that has occurred in 2006 is the execution of the service and insurance contracts by the taxpayer.

Rev. Rul. 2007-3 concludes that...