Recognizing unbilled revenue.

• Author: Zuber, Tim

In Technical Advice Memorandum (TAM) 200903079, the IRS applied the all-events test for income recognition to service contacts that were subject to the Federal Acquisition Regulations (FAR), 48 CFR Chapter 1. This article discusses the IRS's interpretation and application of the Sec. 451 rules for determining the event establishing the taxpayer's right to income. Although the TAM does not seem to reflect any new IRS positions, it does apply the income recognition rules to a wide variety of FAR contractual arrangements.

Contract Types and Terms

In the TAM, the taxpayer's contracts with the U.S. government were fixed price, cost plus, and time and materials. Those contracts were subject to the FAR, under which different types of contracts have different rights to bill.

* Fixed-price contracts with milestones (specific tasks the taxpayer must perform): Right to bill conditioned on completion of the milestone and acceptance by the customer.

* Nonmilestone fixed-price contracts: Right to bill monthly, regardless of completion of performance.

* Cost-plus contracts (both fixed and variable fee terms): Right to bill allowable costs every two weeks as work progresses.

* Time-and-materials contracts: Time portion of contract payable at least monthly on submission of a voucher, and materials portion of contract billable every two weeks as work progresses.

Fixed Right to Income

Regs. Sec. 1.451-1(a) includes income in gross income under an accrual method of accounting when (1) all the events have occurred that fix the right to receive the income and (2) the amount can be determined with reasonable accuracy.

Satisfaction of the test for determining when the right to income is fixed occurs upon the earliest of:

* The date payment is made to the taxpayer;

* The date the taxpayer's required performance occurs (i.e., the amount is earned); or

* The date the payment to the taxpayer is due (Schlude, 372 U.S. 128 (1963); Rev. Rul. 2004-52; Rev. Rul. 2003-10; and Rev. Rul. 84-31). The terms of a contract are relevant in determining when the all-events test is satisfied (Decision, Inc., 47 T.C. 58 (1966), acq. 1967-2 C.B. 2).

The main issue in the TAM was whether the taxpayer's method of accounting for unbilled receivables complied with Sec. 451. The taxpayer asserted that its right to income for the unbilled receivables was not fixed until the government paid those amounts. The IRS pointed out that although acceptance of the invoice is a prerequisite to...