Retailer could not accelerate rebate liability via recurring-item exception.

• Author: Gantman, Andrew

On August 22, 2008, the IRS released Chief Counsel Advice (CCA) 200834019, addressing whether a retailer could use the recurring-item exception of Sec. 461(h)(3) to treat its cash rebate liability as incurred in the year of the sale of the rebate-eligible product.

In a nutshell, the Office of Chief Counsel concluded that the taxpayer may not do so, because the rebate liability was not fixed until the customer complied with the rebate requirements and thus did not meet the required all-events test. As a result, the question of the recurring-item exception's applicability was moot.

Incidentally, this CCA is apparently related to CCA 200826006, in which the IRS advised that a retailer's method of accounting for its cash rebate liabilities was not permitted under the regulations. In that case, the taxpayer did not record the full purchase price as income at the time of the sale, even though it received full price at that time. Instead, it reduced its gross receipts by the amount of its estimated rebate payment. Later, if a particular rebate expired, it reversed the prior reduction from gross receipts by bringing back into income the amount of its previously estimated rebate payment. The Service stated that this method did not follow Regs. Sec. 1.461-4(g)(3), which provides that economic performance for rebates occurs as payment is made to the person to whom the liability is owed.

Note: Various sources differ as to whether the economic performance rules are part of the all-events test. Even the IRS seems to treat it both ways: In Publication 538, Accounting Periods and Methods, it seems to view economic performance as separate from the all-events test, whereas in CCA 200834019 it treats economic performance as a third prong in the all-events test. Practically speaking, there is no real difference, since Sec. 461(h)(1) provides that "the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs." Nevertheless, for purposes of this discussion, the all-events test will be treated as a two-prong test.

Background

An accrual-basis taxpayer is generally entitled to deduct an item in a particular year (assuming it is otherwise deductible in the first place) only to the extent that:

1. It meets the all-events test (i.e., all the events have occurred that establish the fact of the liability, and the amount of the liability can be determined with reasonable accuracy); and

2. Economic performance...