Ministerial acts after General Dynamics.

• Author: Conjura, Carol
• Position: IRS determination of when reimbursement occurs

A taxpayer using the accrual method of accounting determines the proper time for reporting both income and expenses under the all-events test. For income items, the all-events test is satisfied when the taxpayer has a fixed right to receive income and the amount can be determined with reasonable accuracy. Similarly, expenses are deductible for the tax year in which the taxpayer's liability has become fixed, determinable with reasonable accuracy and satisfied by economic performance.

In two recent technical advice memorandums, the IRS has considered the extent to which certain contractual terms affect a taxpayer's right to receive income or its obligation to satisfy a liability. Courts have long struggled with the question of whether pending legal or contractual conditions associated with a transaction are substantial enough to defeat a taxpayer's right or obligation, or whether they are so ministerial that the taxpayer's right or obligation is considered to have "ripened" enough to satisfy the first prong of the all-events test. The factual nature of this inquiry makes it unlikely that a test that can be applied in all situations will ever be determined.

The Service has taken the opportunity to address this question recently in the context of advertising services. In IRS Letter Ruling (TAM) 9143083, the taxpayer was a retailer engaged in various promotional activities for products sold in its stores. Under a cooperative advertising arrangement, the taxpayer could obtain reimbursement from the vendor for costs incurred to advertise the vendor's products. The terms of the reimbursement agreement required the taxpayer to submit an authorized claim form within 90 days of the final appearance of an advertisement, and all claims were subject to verification by the vendor of the taxpayer's compliance with the terms of the arrangement.

Contrary to the taxpayer's assertions that the filing of a claim was a necessary precondition to satisfaction of the all-events test, the Service held that the taxpayer's right to reimbursement became fixed at the time the advertising services were performed. Since the taxpayer ordinarily did not submit a claim for three months after the services were provided, this holding accelerated the time for reporting income under the taxpayer's accrual method. Citing a number of court cases, the IRS concluded that the requirement to submit a claim was a purely ministerial act that had no bearing on the taxpayer's right to...