                                              VECO CORPORATION AND SUBSIDIARIES, PETITIONER
                                                 v. COMMISSIONER OF INTERNAL REVENUE,
                                                              RESPONDENT
                                                    Docket No. 24918–10.                  Filed November 20, 2013.

                                                 On its Federal income tax return for the taxable year
                                              ending Mar. 31, 2005 (TYE 2005), P, an accrual method tax-
                                              payer, implemented a proposed change in accounting method
                                              and in so doing accelerated deductions for parts of certain
                                              liabilities attributable to periods after the close of P’s TYE
                                              2005. R rejected P’s proposed change in accounting method
                                              and denied P’s claimed accelerated deductions. P claims that
                                              it was entitled to accelerate the deductions under the ‘‘all
                                              events’’ test of I.R.C. sec. 461 and/or the recurring item excep-
                                              tion to the economic performance rules of I.R.C. sec. 461(h)(3).
                                              For financial statement purposes petitioner accrued the liabil-
                                              ities over more than one taxable year. P treated the liabilities
                                              inconsistently for financial statement and tax purposes. Held:
                                              Because neither the required performances nor the payment
                                              due dates with respect to the majority of the accelerated
                                              deductions occurred before the close of P’s TYE 2005, P failed
                                              to satisfy the first requirement of the all events test of I.R.C.
                                              sec. 461; i.e., P failed to prove that all of the events had
                                              occurred to establish the fact of the liabilities under sec.
                                              1.461–1(a)(2)(i), Income Tax Regs. Held, further, with respect
                                              to the remaining accelerated deductions, P did not satisfy all
                                              of the requirements for the recurring item exception under
                                              I.R.C. sec. 461(h)(3) and, consequently, is not excepted from
                                              the general rule of I.R.C. sec. 461(h)(1) requiring economic
                                              performance, because the liabilities underlying the deductions
                                              were prorated over more than one taxable year, were treated
                                              inconsistently for financial statement and tax purposes, and
                                              were material items for tax purposes within the meaning of
                                              I.R.C. sec. 461(h)(3)(A)(iv)(I). See sec. 1.461–5(b)(4), Income
                                              Tax Regs.

                                           Christina M. Passard, for petitioner.
                                           Davis G. Yee and Keith G. Medleau, for respondent.
                                     440




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    441


                                                                                 OPINION

                                        MARVEL, Judge : On its Federal income tax return for the
                                     taxable year ending (TYE) March 31, 2005, VECO Corp. &
                                     Subsidiaries (collectively, petitioner or affiliated group),
                                     which used the accrual method of accounting, implemented a
                                     proposed change in accounting method that accelerated
                                     approximately $5,010,305 of deductions for parts of certain
                                     liabilities attributable to periods after the close of petitioner’s
                                     TYE March 31, 2005. Petitioner contends it was entitled to
                                     accelerate its deductions for these expenses under the ‘‘all
                                     events’’ test of section 461 1 and/or the recurring item excep-
                                     tion to the economic performance rules under section
                                     461(h)(3). In a notice of deficiency dated August 17, 2010,
                                     respondent disallowed the portions of the deductions attrib-
                                     utable to periods after March 31, 2005, and accordingly
                                     determined a $1,919,359 deficiency in the Federal income tax
                                     of petitioner for TYE March 31, 2005.
                                        After concessions, 2 the issues for decision are: (1) whether,
                                     under the all events test of section 461, petitioner properly
                                     accelerated and deducted on its Federal income tax return
                                     for TYE March 31, 2005, certain expenses attributable to
                                     periods ending after TYE March 31, 2005; (2) alternatively,
                                     whether section 467 prevents petitioner from using the recur-
                                     ring item exception under section 461(h)(3) to accelerate
                                     deductions for expenses attributable to an equipment lease

                                       1 Unless otherwise indicated, all section references are to the Internal

                                     Revenue Code, as amended and in effect for the year in issue, and all Rule
                                     references are to the Tax Court Rules of Practice and Procedure. Some
                                     monetary amounts have been rounded to the nearest dollar.
                                       2 With respect to the economic performance requirement of the all events

                                     test, petitioner concedes that it did not satisfy the 31⁄2-month rule of sec.
                                     1.461–4(d)(6)(ii), Income Tax Regs., for any of the deductions in issue. With
                                     respect to the recurring item exception to the general rule of economic per-
                                     formance, petitioner concedes that it did not satisfy the matching require-
                                     ment (i.e., the fourth requirement of the recurring item exception) under
                                     sec. 1.461–5(b)(1)(iv)(B) and (5), Income Tax Regs., for any deductions in
                                     issue, with the exception of its deduction for insurance premium expenses.
                                     Respondent concedes that petitioner satisfied the economic performance
                                     and matching requirements of the recurring item exception for petitioner’s
                                     claimed deduction for insurance premium expenses. See sec.
                                     461(h)(3)(A)(ii), (iv); sec. 1.461–5(b)(ii), (iv), Income Tax Regs.




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                                     442                 141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     and certain real estate leases; 3 and (3) if petitioner properly
                                     claimed deductions for expenses under amendment XIV to
                                     the 949 East 36th Avenue lease and the 949 East 36th
                                     Avenue commercial sublease agreement for the period after
                                     March 31, 2005, whether, under section 1.1502–13(c), Income
                                     Tax Regs., petitioner must include in income the rent peti-
                                     tioner received under those leases for the same period.
                                     Because we conclude that petitioner did not properly deduct
                                     the accelerated expenses attributable to periods after March
                                     31, 2005, on its Federal income tax return for TYE March 31,
                                     2005, we do not reach issues (2) and (3).

                                                                               Background
                                       The parties submitted this case fully stipulated under Rule
                                     122. We incorporate the stipulated facts, and facts drawn
                                     from stipulated exhibits, into our findings by this reference.
                                     I. Background
                                       VECO Corp. is a corporation organized and existing under
                                     Delaware law with its principal office in Alaska. VECO Corp.
                                     is the common parent of an affiliated group of corporations
                                     that includes VECO Equipment, Inc. (VECO Equipment),
                                     VECO Services, Inc. (VECO Services), VECO Alaska, Inc.
                                     (VECO Alaska), 4 VECO USA, Inc. (VECO USA), 5 VECO
                                     36th Avenue, Inc. (VECO 36th Avenue), VECO Properties,
                                     Inc. (VECO Properties), 6 Norcon, Inc., RTX, Inc., HEBL, Inc.,
                                     and VECO Federal, Inc.
                                       Petitioner is engaged in various business activities
                                     including oil and gas field services, newspaper publishing,
                                     manufacturing, construction, equipment rental, wholesale
                                     sales, leasing, and engineering. During years preceding and
                                       3 These leases include the Frontier Building lease, see infra pp. 452–453,

                                     the 6411 A Street lease, see infra pp. 453–454, amendment XIV to the
                                     949 East 36th Avenue lease, see infra pp. 454–455, and the 949 East
                                     36th Avenue commercial sublease agreement, see infra pp. 455–456.
                                       4 During TYE March 31, 2005, VECO Alaska was a subsidiary of VECO

                                     Services.
                                       5 VECO USA formerly was known as Veco Rocky Mountain, Inc. (Veco

                                     Rocky Mountain), which itself formerly was known as VECO Rapley, Inc.,
                                     and/or Rapley Engineering Services, Inc. (Rapley Engineering Services).
                                       6 During TYE March 31, 2005, VECO Properties was a subsidiary of

                                     VECO Equipment, itself a subsidiary of VECO Corp.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    443


                                     including the taxable year in issue petitioner entered into a
                                     number of service contracts, licensing contracts, insurance
                                     contracts, and real property and equipment leases, described
                                     infra.
                                        Petitioner prepared consolidated financial statements in
                                     accordance with generally accepted accounting principles
                                     (GAAP) for fiscal years ending (FYE) March 31, 2005, 2006,
                                     and 2007. Petitioner maintained general ledgers and working
                                     trial balances for each member of the affiliated group for
                                     FYE March 31, 2005. For Federal income tax purposes, peti-
                                     tioner uses the accrual method of accounting and has a TYE
                                     March 31.
                                     II. Petitioner’s Tax Reporting
                                        Petitioner filed a Form 1120, U.S. Corporation Income Tax
                                     Return, for TYE March 31, 2005, on which it reported total
                                     income of $71,497,738 and claimed total deductions of
                                     $64,608,986. 7 Petitioner attached to its return a Form 3115,
                                     Application for Change in Accounting Method, for TYE
                                     March 31, 2005, requesting an accounting method change
                                     pursuant to Rev. Proc. 2005–9, 2005–1 C.B. 303. 8 Petitioner
                                     reported on an attachment to the Form 3115 that it pres-
                                     ently deducted liabilities as follows: (1) with respect to liabil-
                                     ities for which economic performance was satisfied by pay-
                                     ment, petitioner capitalized the liability and amortized the
                                     payment over the life of the agreement; (2) with respect to
                                     liabilities for which economic performance was not satisfied
                                     by payment, petitioner deducted the liabilities ‘‘in the period
                                     to which they relate.’’ Petitioner proposed a change in its
                                     accounting method to: (1) deduct liabilities in the year
                                     incurred under the all events test, with modifications under
                                     the recurring item exception for insurance and maintenance
                                       7 Petitioner claimed deductions on a consolidated basis and per sub-

                                     sidiary. Petitioner does not have documentation to show the total expenses
                                     attributable to the software license and maintenance contracts, service
                                     contracts, real estate leases, and equipment lease on an entity-specific
                                     basis or a consolidated basis.
                                       8 Rev. Proc. 2005–9, sec. 1, 2005–1 C.B. 303, provides administrative pro-

                                     cedures under which a taxpayer may obtain automatic consent to change
                                     to a method of accounting provided in secs. 1.263(a)–4, 1.263(a)–5, and
                                     1.167(a)–3(b), Income Tax Regs., for the taxpayer’s second taxable year
                                     ending on or after December 31, 2003.




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                                     444                 141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     agreement payments; and (2) with respect to rent liabilities
                                     for which economic performance is not satisfied by payment,
                                     deduct the liabilities ‘‘in the year the liabilities are fixed and
                                     determinable with reasonable accuracy, and where economic
                                     performance has occurred’’.
                                       Petitioner implemented its proposed change in accounting
                                     method and prepared its Form 1120 for TYE March 31, 2005,
                                     accordingly. As a result of the change in accounting method,
                                     petitioner claimed deductions for prepaid expenses and
                                     accrued expenses attributable to periods after March 31,
                                     2005, claiming that its tax treatment of the expenses was
                                     permitted under the all events test of section 461 and/or the
                                     recurring item exception under section 461(h)(3). Those accel-
                                     erated deductions are at issue here.
                                           A. Prepaid Expenditures
                                           1. Aspen Technology Agreement
                                        On March 31, 2003, VECO Corp. and Aspen Technology,
                                     Inc. (Aspen Technology), entered into a software license and
                                     service agreement for the period from March 31, 2003,
                                     through March 31, 2009 (Aspen agreement). Under the
                                     Aspen agreement Aspen Technology licensed use of its soft-
                                     ware and agreed to provide software maintenance services to
                                     VECO Corp. VECO Corp. agreed to pay license fees over six
                                     consecutive years as follows: (1) $161,000 on April 30, 2003; 9
                                     (2) $206,000 on March 30, 2004; (3) $212,180 on March 30,
                                     2005; (4) $218,545 on March 30, 2006; (5) $225,102 on March
                                     30, 2007; and (6) $231,855 on March 30, 2008. VECO Corp.
                                     also agreed to pay an annual service fee of $11,945 10 for the
                                     first effective year of the contract and an annual service fee
                                     of $38,000 for each subsequent year.
                                        VECO Corp. made payments to Aspen Technology as fol-
                                     lows: (1) $172,945 on June 6, 2003; (2) $39,140 on June 29,
                                     2004; and (3) $40,314 on April 27, 2005. In February 2006
                                     VECO Corp. received an invoice dated February 13, 2006,
                                        9 The Aspen agreement provided that VECO Corp. had prepaid the li-

                                     cense fees under a prior agreement by $39,000 and that the amount of the
                                     first license fee payment had been adjusted accordingly.
                                        10 The Aspen agreement provided that VECO Corp. had prepaid service

                                     fees of $26,055 under a prior agreement and that the first service fee pay-
                                     ment had been adjusted accordingly.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    445


                                     from Bank of America Leasing for $218,545 with respect to
                                     the Aspen agreement. VECO Corp. paid the invoice by check
                                     dated February 24, 2006, made payable to Bank of America
                                     Leasing.
                                       Petitioner treated $200,235, 11 which was attributable to
                                     the period April 1 to August 1, 2005, as an FYE March 31,
                                     2006, expense on its financial statements for that year. How-
                                     ever, petitioner deducted the $200,235 on its return for TYE
                                     March 31, 2005.
                                           2. Primavera Agreement
                                       Primavera provided software management services for
                                     VECO Alaska pursuant to a service agreement between
                                     Primavera and VECO Alaska that is not in the record.
                                       Primavera issued an invoice dated December 31, 2004, for
                                     $10,600 to VECO Alaska. VECO Alaska paid the invoice by
                                     check dated April 4, 2005.
                                       Petitioner treated $7,950, 12 which was attributable to the
                                     period April 1 to December 1, 2005, as an FYE March 31,
                                     2006, expense on its financial statements for that year. How-
                                     ever, petitioner deducted the $7,950 on its return for TYE
                                     March 31, 2005.
                                           3. Surveyor’s Exchange Agreement
                                       The record does not contain a copy of the service agree-
                                     ment between Surveyor’s Exchange Co. (Surveyor’s
                                     Exchange) and VECO Alaska.
                                       Surveyor’s Exchange issued an invoice dated March 17,
                                     2005, for $51,895 for Autocad subscription renewals to VECO
                                     Alaska. VECO Alaska paid the invoice by check dated April
                                     14, 2005.
                                        11 The parties stipulated the amount and treatment of this expense for

                                     petitioner’s financial accounting and tax reporting purposes. However, peti-
                                     tioner’s summary analysis of its Schedule M–3, Net Income (Loss) Rec-
                                     onciliation for Corporations With Total Assets of $10 Million or More,
                                     shows that petitioner accelerated expenses attributable to the Aspen agree-
                                     ment of $212,180. Petitioner failed to offer any explanation, and the record
                                     contains no evidence, as to how petitioner calculated the amount of this
                                     particular accelerated deduction.
                                        12 The $7,950 is equal to the portion of the total amount due to

                                     Primavera for services provided during the period April 1 to December 1,
                                     2005.




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                                     446                  141 UNITED STATES TAX COURT REPORTS                                   (440)


                                        For financial statement purposes, petitioner recorded the
                                     Autocad expenses on a straight-line basis over the term of its
                                     contract with Surveyor’s Exchange. Petitioner treated the
                                     $51,895, which was attributable to the period April 1, 2005,
                                     to March 1, 2006, as an FYE March 31, 2006, expense on its
                                     financial statements for that year. However, petitioner
                                     deducted the $51,895 on its return for TYE March 31, 2005.
                                           4. Invensys Systems Agreement
                                       In March 2004 VECO USA entered into a computer pro-
                                     gram license agreement with Invensys Systems, Inc.
                                     (Invensys), for the period March 1, 2004, through February
                                     28, 2007 (Invensys agreement), that required VECO USA to
                                     pay total license fees of $156,522 and total maintenance fees
                                     of $23,478. The agreement required VECO USA to pay
                                     annual license and maintenance fees of $52,174 and $7,826,
                                     respectively, on March 1, 2004, 2005, and 2006.
                                       Invensys issued to VECO USA an invoice dated March 22,
                                     2004, for $64,920 covering the period from March 1, 2004, to
                                     February 28, 2007. 13 VECO USA paid the invoice by a check
                                     dated April 28, 2004.
                                       For financial statement purposes, petitioner recorded the
                                     Invensys agreement expenses on a straight-line basis over
                                     the term of the agreement. Petitioner treated $59,420, 14
                                     which was attributable to the period April 1 to December 15,
                                     2005, as an FYE March 31, 2006, expense on its financial
                                     statements for that year. However, petitioner deducted the
                                     $59,420 on its return for TYE March 31, 2005.
                                     B. Expenditures Accrued for Periods After March 31, 2005
                                           1. Service Contracts
                                           a. Marsh Agreement
                                       On January 10, 2005, VECO Corp. entered into an insur-
                                     ance brokerage service agreement with Marsh USA, Inc.
                                     (Marsh), for the period January 10 through December 31,
                                           13 The
                                                difference between the $60,000 specified under the Invensys
                                     agreement and the $64,920 on the invoice is attributable to sales tax.
                                       14 Petitioner failed to offer any explanation, and the record contains no

                                     evidence, as to how petitioner calculated the amount of this particular de-
                                     duction.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    447


                                     2005 (Marsh agreement). Under the Marsh agreement VECO
                                     Corp. agreed to pay Marsh a fixed fee of $300,000 payable as
                                     follows: (1) $75,000 on February 1, 2005; (2) $30,000 on April
                                     1, 2005; (3) $45,000 on June 30, 2005; (4) $75,000 on Sep-
                                     tember 30, 2005; and (5) $75,000 on December 31, 2005.
                                     VECO Corp. made payments to Marsh as follows: (1) $60,000
                                     on March 4, 2005; (2) $120,000 on April 1, 2005; (3) $45,000
                                     on June 17, 2005; and (4) $75,000 on October 3, 2005.
                                        For financial statement purposes petitioner recorded the
                                     expenses under the Marsh agreement on a straight-line basis
                                     over the term of the agreement. Petitioner treated
                                     $225,000, 15 which was attributable to the period April 1 to
                                     December 31, 2005, as an FYE March 31, 2006, expense on
                                     its financial statements for that year. However, petitioner
                                     deducted the $225,000 on its return for TYE March 31, 2005.
                                           b. ACS Agreement
                                       The record does not contain a copy of the service agree-
                                     ment between ACS and VECO Alaska.
                                       For financial statement purposes petitioner recorded the
                                     expenses under the ACS agreement on a straight-line basis
                                     over the term of the agreement. Petitioner treated $14,779, 16
                                     which was attributable to the period April 1 to December 31,
                                     2005, as an FYE March 31, 2006, expense on its financial
                                     statements for that year. However, petitioner deducted the
                                     $14,779 on its return for TYE March 31, 2005.
                                           c. Schwamm & Frampton Agreement
                                       In February 1999 VECO Properties entered into a manage-
                                     ment agreement with Schwamm & Frampton, LLC
                                     (Schwamm & Frampton), for a term of one year, which auto-
                                     matically was renewed in February of each year (Schwamm
                                     & Frampton agreement). Under the agreement Schwamm &
                                     Frampton agreed to provide property management services
                                     for University Plaza, a property owned by VECO Properties,
                                       15 Petitioner calculated this amount by adding the amounts of the four

                                     payments it made during 2005 and then multiplying that total by 75%.
                                       16 Petitioner’s summary analysis of its Schedule M shows that VECO

                                     Alaska was required to make monthly payments to ACS of $1,739. While
                                     petitioner’s accounts payable vendor history distribution to ACS shows
                                     that VECO Alaska made fairly regular payments to ACS, the payments
                                     made during 2004–05 ranged from $1,321 to $1,324 per month.




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                                     448                  141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     and to act as agent for VECO Properties. VECO Properties
                                     agreed to make monthly payments equal to the greater of: (1)
                                     $6,250 or (2) 4% of the monthly gross rental receipts, as
                                     VECO Properties received such receipts.
                                        During FYE March 31, 2005, VECO Properties made one
                                     payment of $460 to Schwamm & Frampton. On April 20,
                                     2005, VECO Properties made a payment of $7,500 to
                                     Schwamm & Frampton.
                                        For financial statement purposes petitioner recorded the
                                     expenses under the Schwamm & Frampton agreement on a
                                     straight-line basis over the term of the agreement. Petitioner
                                     treated $6,250, which was attributable to the period April 1
                                     to April 30, 2005, as an FYE March 31, 2006, expense on its
                                     financial statements for that year. However, petitioner
                                     deducted the $6,250 on its return for TYE March 31, 2005.
                                           d. Otis Elevator Agreement
                                        In February 2002 Schwamm & Frampton, as agent for
                                     VECO Properties, entered into a maintenance agreement
                                     with Otis Elevator Co. (Otis Elevator) for the period Feb-
                                     ruary 1, 2002, through January 31, 2007 (Otis Elevator
                                     agreement). Under the agreement Otis Elevator agreed to
                                     provide maintenance services at University Plaza for a fee of
                                     $1,950 per month, and Schwamm & Frampton agreed to
                                     make quarterly payments on or before the last day of the
                                     month before the billing period. 17 Neither VECO Corp. nor
                                     VECO Properties made any direct payments to Otis Elevator.
                                        For financial statement purposes petitioner recorded the
                                     expenses under the Otis Elevator agreement on a straight-
                                     line basis over the term of the agreement. Petitioner treated
                                     $16,575, 18 which was attributable to the period April 1 to
                                     December 15, 2005, as an FYE March 31, 2006, expense on
                                     its financial statements for that year. However, petitioner
                                     deducted the $16,575 on its return for TYE March 31, 2005.


                                           17 The
                                             Otis Elevator agreement further provided that the billing period
                                     would begin on February 1, 2002, the commencement date.
                                      18 The $16,575 is equal to the monthly payment rate for April through

                                     November 2005 plus an additional $975 attributable to the monthly pay-
                                     ment rate for the first half of December 2005.




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                                     (440)                  VECO CORP. & SUBS. v. COMMISSIONER                                    449


                                           e. Q–1 Agreement
                                       In September 1999 Schwamm & Frampton, as agent for
                                     VECO Properties, entered into a maintenance agreement
                                     with Q–1 Corp. (Q–1) for the period September 15, 1999,
                                     through September 14, 2000, with automatic renewal each
                                     year (Q–1 agreement). Under the Q–1 agreement VECO
                                     Properties agreed to make monthly payments of $9,984 for
                                     maintenance services, with payment due in arrears on the
                                     10th day of the month following provision of the
                                     services. In November 2005 VECO Properties and Q–1
                                     amended the Q–1 agreement to provide for a monthly fee of
                                     $9,221.
                                       For financial statement purposes, petitioner recorded the
                                     expenses under the Q–1 agreement on a straight-line basis
                                     over the term of the agreement. Petitioner treated $59,940, 19
                                     which was attributable to the period April 1 to October 15,
                                     2005, as an FYE March 31, 2006, expense on its financial
                                     statements for that year. However, petitioner deducted the
                                     $59,940 on its return for TYE March 31, 2005.
                                           2. Insurance Premium Agreement
                                       On April 28, 2005, VECO Corp. entered into a commercial
                                     premium finance agreement with Marsh, an insurance
                                     broker, for insurance policies with effective dates of April 1,
                                     2005, for 12 months of coverage (insurance premium agree-
                                     ment). The agreement provided for total premiums of
                                     $3,445,037 and required VECO Corp. to make 10 monthly
                                     payments of $316,714 beginning May 1, 2005.
                                       On its return for TYE March 31, 2005, petitioner deducted
                                     $2,304,165 20 for insurance premium expenses attributable to
                                     the period April 1 to December 15, 2005.


                                           19 Although
                                                    the Q–1 agreement was not amended until November 2005,
                                     petitioner’s summary analysis of its Schedule M shows that petitioner cal-
                                     culated the amount of the deduction on the basis of a monthly fee of $9,221
                                     for the 61⁄2-month period from April 1 to October 15, 2005.
                                       20 Petitioner calculated this amount by multiplying the total premium by

                                     81.96%, a figure purportedly equal to the amount of the premium for the
                                     period May 1, 2005, through February 1, 2006, that petitioner had paid by
                                     December 15, 2005.




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                                     450                 141 UNITED STATES TAX COURT REPORTS                                   (440)


                                           3. Real Property Leases
                                           a. Arctic Spur Lease
                                       On June 24, 2004, VECO Equipment entered into a lease
                                     agreement with Arctic Spur Investments (Arctic Spur) for
                                     property at 6411 A Street, Anchorage, Alaska (Arctic Spur
                                     lease). The term of the Arctic Spur lease was July 1, 2004,
                                     through June 30, 2005. Under the Arctic Spur lease VECO
                                     Equipment agreed to pay monthly rent of $7,500 on the first
                                     day of each month.
                                       For financial and tax accounting purposes VECO Corp.
                                     allocated $3,674 of the monthly rent to itself and $3,827 to
                                     VECO Alaska. For financial statement purposes petitioner
                                     recorded the expenses under the Arctic Spur lease on a
                                     straight-line basis over the term of the lease.
                                       Petitioner treated $11,022 and $11,480, which were attrib-
                                     utable to the period April 1 to June 30, 2005, as FYE March
                                     31, 2006, expenses on its financial statements for that year.
                                     However, petitioner deducted the $11,021 (paid through
                                     VECO Corp.) and the $11,480 (paid through VECO Alaska)
                                     on its return for TYE March 31, 2005.
                                           b. Wyoming Lease
                                       On September 25, 1996, VECO USA entered into a lease
                                     with Rock Spring Plaza, LLC, for office space at a property
                                     in Wyoming (Wyoming lease). On September 1, 2004, VECO
                                     USA and TRB #3 Owners Corp., owner of the Wyoming prop-
                                     erty, amended the original lease to extend the term for one
                                     year from September 1, 2004, to August 31, 2005. Under the
                                     Wyoming lease as amended VECO USA agreed to make
                                     monthly rent payments of $1,694 on the first day of each
                                     month.
                                       For financial statement purposes petitioner recorded the
                                     expenses under the Wyoming lease on a straight-line basis
                                     over the term of the lease. Petitioner treated $8,468, which
                                     was attributable to the period April 1 through August 31,
                                     2005, as an FYE March 31, 2006, expense on its financial
                                     statements for that year. However, petitioner deducted the
                                     $8,468 on its return for TYE March 31, 2005.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    451


                                           c. Golden Lease
                                       On April 17, 1999, Veco Rocky Mountain entered into a
                                     lease with Gold Office Building for office space at a property
                                     in Golden, Colorado (Golden lease). On February 24, 2005,
                                     VECO USA and Gold Office Building amended the original
                                     lease to extend the term for a period of one year beginning
                                     March 1, 2005, and ending February 28, 2006. Under the
                                     lease as amended VECO USA agreed to pay monthly rent of
                                     $4,410 on the first day of each month.
                                       For financial statement purposes petitioner recorded the
                                     expenses under the Golden lease on a straight-line basis over
                                     the term of the lease. Petitioner treated $34,359, 21 which
                                     was attributable to the period April 1 through December 15,
                                     2005, as an FYE March 31, 2006, expense on its financial
                                     statements for that year. However, petitioner deducted the
                                     $34,359 on its return for TYE March 31, 2005.
                                           d. Durango Lease
                                       On June 1, 2004, VECO USA entered into a lease with
                                     Lunceford Investments for office space in Durango, Colorado
                                     (Durango lease). The term of the Durango lease was June 1,
                                     2004, through May 31, 2005. Under the Durango lease VECO
                                     USA agreed to make monthly rent payments of $2,067 on or
                                     before the first day of the month.
                                       For financial statement purposes petitioner recorded the
                                     expenses under the Durango lease on a straight-line basis
                                     over the term of the lease. Petitioner treated $4,134, which
                                     was attributable to the period April 1 through May 31, 2005,
                                     as an FYE March 31, 2006, expense on its financial state-
                                     ments for that year. However, petitioner deducted the $4,134
                                     on its return for TYE March 31, 2005.
                                           e. Bay Street Lease
                                       On January 1, 2005, VECO USA entered into a lease
                                     agreement with Bay Building LLC (Bay Building) for office
                                     space in Bay Street, Washington (Bay Street lease). The term
                                     of the Bay Street lease was January 1, 2005, through
                                       21 Petitioner’s summary analysis of its Schedule M shows that petitioner

                                     calculated this amount using a monthly rent of $4,042 rather than the
                                     $4,410 provided for under the Golden lease as amended.




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                                     452                 141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     December 31, 2009. Under the Bay Street lease, VECO USA
                                     agreed to pay Bay Building monthly rent of $33,990 before
                                     the first day of each month.
                                        For financial statement purposes petitioner recorded the
                                     expenses under the Bay Street lease on a straight-line basis
                                     over the term of the lease. Petitioner treated $294,696, 22
                                     which was attributable to the period April 1 through
                                     December 15, 2005, as an FYE March 31, 2006, expense on
                                     its financial statements for that year. However, petitioner
                                     deducted the $294,696 on its return for TYE March 31, 2005.
                                           f. Englewood Lease
                                        On May 26, 1994, Rapley Engineering Services entered
                                     into a lease agreement with Highland Court LLC for office
                                     space in Englewood, Colorado (Englewood lease). The term of
                                     the lease was July 1, 1994, through June 30, 2000. On
                                     December 16, 2002, Veco Rocky Mountain and Prentiss Prop-
                                     erties amended the Englewood lease to extend the term for
                                     five years, from August 1, 2002, through June 30, 2007.
                                     Under the Englewood lease as amended, Veco Rocky Moun-
                                     tain agreed to pay monthly base rent of $43,450 on or before
                                     the first day of each month.
                                        For financial statement purposes, petitioner recorded the
                                     expenses under the Englewood lease on a straight-line basis
                                     over the term of the lease. Petitioner treated $380,103, 23
                                     which was attributable to the period April 1 through
                                     December 15, 2005, as an FYE March 31, 2006, expense on
                                     its financial statements for that year. However, petitioner
                                     deducted the $380,103 on its return for TYE March 31, 2005.
                                           g. Frontier Building Lease
                                        On March 22, 2000, VECO Corp. entered into a lease
                                     agreement with Frontier Building Limited Partnership for
                                     space at the Frontier Building in Anchorage, Alaska (Fron-
                                     tier Building lease). The term of the Frontier Building lease
                                       22 Petitioner’s summary analysis of its Schedule M shows that petitioner

                                     calculated this amount using a monthly rent rate of $34,670 rather than
                                     the $33,990 provided for under the Bay Street lease.
                                       23 Petitioner’s summary analysis of its Schedule M shows that petitioner

                                     calculated this amount using a monthly rent of $44,718 rather than the
                                     $43,450 provided for under the Englewood lease as amended.




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                                     (440)                  VECO CORP. & SUBS. v. COMMISSIONER                                    453


                                     was July 1, 2000, through November 30, 2005. The Frontier
                                     Building lease required VECO Corp. to pay a fixed minimum
                                     monthly rent, subject to increases based on the Anchorage
                                     Consumer Price Index, 24 on the first day of each month. 25
                                     For the period October 1, 2003, to September 30, 2004, the
                                     fixed minimum monthly rent was $17,569. For the period
                                     October 1, 2004, to September 30, 2005, the fixed minimum
                                     monthly rent was $17,939. 26
                                        For financial statement purposes petitioner recorded the
                                     expenses under the Frontier Building lease on a straight-line
                                     basis over the term of the lease. Petitioner treated
                                     $107,637, 27 which was attributable to the period April 1
                                     through September 30, 2005, as an FYE March 31, 2006,
                                     expense on its financial statements for that year. However,
                                     petitioner deducted the $107,637 on its return for TYE
                                     March 31, 2005.
                                           h. 6411 A Street Lease
                                       On December 22, 1999, VECO Equipment entered into a
                                     lease with Carr-Gottstein Foods Co. for property at 6411 A
                                     Street, Anchorage, Alaska (6411 A Street lease). The term of
                                     the lease was March 1, 2000, to December 31, 2010. The
                                     6411 A Street lease required VECO Equipment to pay a fixed
                                     minimum monthly rent on the first day of each month. For
                                     the period March 1, 2004, to February 28, 2005, the fixed
                                     minimum monthly rent was $54,599. For the period March
                                           24 For
                                               2004 the Anchorage Consumer Price Index had a percentage
                                     change of 2.58%. For 2005 the Anchorage Consumer Price Index had a per-
                                     centage change of 3.06%.
                                       25 For the period from October 1, 2003, through September 30, 2004,

                                     VECO Corp. paid the following amounts under the Frontier Building lease:
                                     October 2003—$18,582; November 2003—$18,666; December 2003—
                                     $18,666; January 2004—$19,318; February 2004—$19,318; March 2004—
                                     $19,318; April 2004—$19,318; May 2004—$21,116; June 2004—$19,318;
                                     July 2004—$19,318; August 2004—$19,318; and September 2004—
                                     $19,318.
                                       26 The fixed minimum monthly rent of $17,939 for the period October 1,

                                     2004, to September 30, 2005, was less than a 2.58% increase from the
                                     monthly rent that VECO Corp. paid for the period October 1, 2003, to Sep-
                                     tember 30, 2004.
                                       27 Petitioner’s summary analysis of its Schedule M shows that petitioner

                                     calculated this amount using a monthly payment rate of $17,939.




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                                     454                 141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     1, 2005, to February 28, 2006, the fixed minimum monthly
                                     rent was $60,626. 28
                                       For financial statement purposes, petitioner recorded the
                                     expenses under the 6411 A Street lease on a straight-line
                                     basis over the term of the lease. Petitioner treated
                                     $515,324, 29 which was attributable to the period April 1
                                     through December 15, 2005, as an FYE March 31, 2006,
                                     expense on its financial statements for that year. However,
                                     petitioner deducted the $515,324 on its return for TYE
                                     March 31, 2005.
                                           i. 949 East 36th Avenue
                                        On or about August 22, 1995, VECO Engineering entered
                                     into a lease agreement with Alaska Pacific University to rent
                                     property at 949 East 36th Avenue, Anchorage, Alaska (949
                                     East 36th Avenue lease). Under the 949 East 36th Avenue
                                     lease VECO Engineering agreed to make monthly rent pay-
                                     ments on or before the first day of the month. VECO
                                     Engineering and Alaska Pacific University subsequently
                                     entered into a number of agreements amending the lease to
                                     extend the term of the lease and to provide VECO
                                     Engineering with increased space at the 949 East 36th
                                     Avenue property.
                                        On March 1, 1999, VECO Properties and VECO
                                     Engineering entered into an agreement to amend the lease
                                     to extend the term to December 31, 2005, effective upon the
                                     closing of the acquisition of the 949 East 36th Avenue prop-
                                     erty by VECO Properties. On or about March 7, 1999, Alaska
                                     Pacific University assigned its interest in the lease to peti-
                                     tioner. As of September 1, 1999, VECO Engineering assigned
                                     its interest in the lease to VECO Alaska.
                                           (i) Amendment XIV to the 949 East 36th Avenue Lease
                                       VECO Properties, as landlord, and VECO Alaska, as ten-
                                     ant, subsequently amended the 949 East 36th Avenue lease
                                       28 The fixed minimum monthly rent of $60,626 for the period March 1,

                                     2005, to February 28, 2006, was less than a 2.58% increase from the
                                     monthly rent that petitioner paid for the period October 1, 2003, to Sep-
                                     tember 30, 2004.
                                       29 Petitioner’s summary analysis of its Schedule M shows that petitioner

                                     calculated this amount using a monthly payment rate of $60,626.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    455


                                     numerous times to provide VECO Alaska with increased
                                     rental space. All of the amendments extended the term of the
                                     lease to December 31, 2005, except for amendment No. XIV
                                     to the 949 East 36th Avenue lease (amendment XIV to the
                                     949 East 36th Avenue lease). Amendment XIV to the 949
                                     East 36th Avenue lease provided for a lease term of April 12,
                                     2004, to April 11, 2006, for 11,971 square feet of space on the
                                     fourth floor of the 949 East 36th Avenue property at a
                                     monthly rent of $25,546 for the first year and $25,890 for the
                                     second year.
                                       For financial statement purposes petitioner recorded the
                                     expenses under amendment XIV to the 949 East 36th
                                     Avenue lease on a straight-line basis over the term of the
                                     amended lease. Petitioner treated $220,066, 30 which was
                                     attributable to the period April 1 through December 15,
                                     2005, as an FYE March 31, 2006, expense on its financial
                                     statements for that year. However, petitioner, through VECO
                                     Alaska, deducted the $220,066 on its return for TYE March
                                     31, 2005. Petitioner did not include the $220,066 as rental
                                     income of VECO Properties on its return for TYE March 31,
                                     2005.
                                           (ii) 949 East 36th Avenue Commercial Sublease Agreement
                                       On June 1, 2005, VECO Corp. entered into a commercial
                                     lease agreement with VECO 36th Avenue regarding the 949
                                     East 36th Street property (949 East 36th Avenue commercial
                                     lease agreement). The term of the lease was June 1, 2005, to
                                     May 31, 2020. Under the 949 East 36th Avenue commercial
                                     lease agreement VECO Corp. agreed to pay monthly rent of
                                     $222,499 on or before the first day of each month, with
                                     increases in the monthly rent based on the Consumer Price
                                     Index.
                                       On June 1, 2005, VECO Corp. entered into a commercial
                                     sublease agreement with VECO Alaska regarding the 949
                                     East 36th Avenue property (949 East 36th Avenue commer-
                                     cial sublease agreement). The term of the sublease was June
                                     1, 2005, to May 31, 2020. Under the 949 East 36th Avenue
                                     commercial sublease agreement VECO Alaska agreed to pay
                                     monthly rent of $224,206 on or before the first day of each
                                       30 Petitioner’s summary analysis of its Schedule M shows that petitioner

                                     calculated this amount using a monthly payment rate of $25,890.




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                                     456                  141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     month, with increases in the monthly rent based on the Con-
                                     sumer Price Index.
                                        For financial statement purposes, petitioner recorded the
                                     expenses under the 949 East 36th Avenue commercial sub-
                                     lease agreement on a straight-line basis over the term of the
                                     sublease agreement. Petitioner treated $221,070, 31 which
                                     was attributable to a two-month rental period commencing
                                     after March 31, 2005, as an FYE March 31, 2006, expense on
                                     its financial statements for that year. However, petitioner,
                                     through VECO Alaska, deducted the $221,070 on its return
                                     for TYE March 31, 2005. Petitioner did not include the
                                     $221,070 as rental income on its return for TYE March 31,
                                     2005.
                                           4. IKON Equipment Lease
                                        On May 21, 2004, VECO Services and IKON Financial
                                     Services (IKON) entered into an equipment lease (IKON
                                     equipment lease) for a term of 60 months. Under the IKON
                                     equipment lease and the accompanying product schedule,
                                     VECO Services agreed to make monthly rent payments of
                                     $25,785, with the first payment made on or before the effec-
                                     tive date 32 and the remaining payments made on the same
                                     day each month. On January 14, 2005, VECO Alaska and
                                     IKON amended the IKON equipment lease to provide for an
                                     increased minimum monthly payment of $27,780. On April
                                     13, 2005, VECO Services and IKON amended the IKON
                                     equipment lease to provide for an increased minimum
                                     monthly payment of $28,002. On March 28, 2007, VECO
                                     Services and IKON amended the IKON equipment lease to
                                     provide for an increased minimum monthly payment of
                                     $37,128.
                                           31 Petitioner’s
                                                       summary analysis of its Schedule M shows that petitioner
                                     calculated this amount using a monthly payment rate of $110,535. Peti-
                                     tioner failed to offer any explanation, and the record contains no evidence,
                                     as to why petitioner used a monthly payment rate of $110,535 rather than
                                     the amount specified in the 949 East 36th Avenue commercial sublease
                                     agreement.
                                        32 The record does not show the effective date of the IKON equipment

                                     lease. VECO Services entered into the master agreement with respect to
                                     the IKON equipment lease on May 21, 2004, and entered into the product
                                     schedule on July 15, 2004.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    457


                                       Petitioner treated $225,738, 33 which was attributable to
                                     the period April 1 through December 15, 2005, as an FYE
                                     March 31, 2006, expense in its financial statements for that
                                     year. However, petitioner deducted the $255,739 on its
                                     return for TYE March 31, 2005.
                                     III. Notice of Deficiency
                                        Respondent issued to petitioner the notice of deficiency for
                                     TYE March 31, 2005, determining that petitioner was not
                                     permitted to change its method of accounting for its prepaid
                                     and accrued expenditures. Accordingly, respondent dis-
                                     allowed portions of petitioner’s claimed deductions as follows:
                                     (1) $200,235 under the Aspen agreement; (2) $7,950 under
                                     the Primavera agreement; (3) $51,895 under the Surveyor’s
                                     Exchange agreement; (4) $59,420 under the Invensys agree-
                                     ment; (5) $225,000 under the Marsh agreement; (6) $14,779
                                     under the ACS agreement; (7) $16,575 under the Otis
                                     Elevator agreement; (8) $6,250 under the Schwamm &
                                     Frampton agreement; (9) $59,940 under the Q–1 agreement;
                                     (10) $2,304,165 under the insurance premium agreement;
                                     (11) $22,501 under the Arctic Spur lease; (12) $8,468 under
                                     the Wyoming lease; (13) $34,359 under the Golden lease; (14)
                                     $4,134 under the Durango lease; (15) $294,696 under the Bay
                                     Street lease; (16) $380,103 under the Englewood lease; (17)
                                     $107,637 under the Frontier Building lease; (18) $515,324
                                     under the 6411 A Street lease; (19) $220,066 under amend-
                                     ment XIV to the 949 East 36th Avenue lease; (20) $221,070
                                     under the 949 East 36th Avenue commercial sublease agree-
                                     ment; and (21) $255,738 under the IKON equipment lease.
                                     Respondent determined that petitioner was not entitled to
                                     these deductions because: (1) petitioner failed to establish
                                     that it incurred the related expenses during TYE March 31,
                                     2005, 34 and (2) petitioner’s method of claiming the deduc-
                                     tions did not clearly reflect income within the meaning of
                                     section 446(b). Respondent alternatively determined that if
                                     VECO Alaska was entitled to deductions of $220,066 and
                                       33 Petitioner’s summary analysis of its Schedule M shows that petitioner

                                     calculated this amount using a monthly rental rate of $30,087 rather than
                                     the rate provided for under the IKON equipment lease as amended.
                                       34 Respondent also determined that even if petitioner satisfied the all

                                     events test of sec. 461 for the claimed deductions, petitioner was required
                                     to capitalize those amounts under sec. 263(a).




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                                     458                 141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     $221,070 for expenses under amendment XIV to the 949 East
                                     36th Avenue lease and the 949 East 36th Avenue commercial
                                     sublease agreement, VECO Properties was required to recog-
                                     nize the receipt of income to that extent under section
                                     1.1502–13, Income Tax Regs.

                                                                                Discussion
                                     I. Burden of Proof
                                       Generally, the Commissioner’s determinations in a notice
                                     of deficiency are presumed correct, and the taxpayer bears
                                     the burden of proving that the determinations are erro-
                                     neous. 35 See Rule 142(a); Welch v. Helvering, 290 U.S. 111,
                                     115 (1933). However, if a taxpayer produces credible evidence
                                     with respect to a factual issue relevant to ascertaining the
                                     taxpayer’s Federal income tax liability, the burden of proof as
                                     to that issue may shift to the Secretary 36 under section
                                     7491(a)(1) if the taxpayer satisfies certain requirements
                                     under section 7491(a)(2). 37
                                        35 Where a taxpayer has requested the Commissioner’s consent to change

                                     its method of accounting, this Court generally reviews the Commissioner’s
                                     refusal to give consent for abuse of discretion. See Capitol Fed. Sav. &
                                     Loan Ass’n v. Commissioner, 96 T.C. 204, 209–210 (1991). The use of an
                                     abuse of discretion standard is premised on the idea that the Commis-
                                     sioner’s ‘‘determination with respect to the issue of whether income is re-
                                     flected clearly is entitled to more than the usual presumption of correct-
                                     ness.’’ Id. at 209.
                                        In the notice of deficiency respondent rejected petitioner’s attempt to
                                     change its former method of accounting with respect to the disputed deduc-
                                     tions. Respondent explained that petitioner had failed to establish that pe-
                                     titioner incurred the expenses attributable to the disputed deductions in
                                     its TYE March 31, 2005, and in addition, petitioner’s method of claiming
                                     the disputed deductions did not clearly reflect income within the meaning
                                     of sec. 446(b). However, in respondent’s brief respondent argues only that
                                     petitioner failed to establish that it incurred the expenses attributable to
                                     the disputed deductions in its TYE March 31, 2005. Respondent does not
                                     contend that this Court should review respondent’s determinations in the
                                     notice of deficiency for abuse of discretion.
                                        36 The term ‘‘Secretary’’ means ‘‘the Secretary of the Treasury or his del-

                                     egate’’, sec. 7701(a)(11)(B), and the term ‘‘or his delegate’’ means ‘‘any offi-
                                     cer, employee, or agency of the Treasury Department duly authorized by
                                     the Secretary of the Treasury directly, or indirectly by one or more redele-
                                     gations of authority, to perform the function mentioned or described in the
                                     context’’, sec. 7701(a)(12)(A)(i).
                                        37 If the taxpayer is a partnership, a corporation, or a trust (other than




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    459


                                       Petitioner does not argue that section 7491(a)(1) shifts the
                                     burden of proof to respondent. In addition, petitioner has not
                                     established (nor do we find) that it satisfied the requirements
                                     of section 7491(a)(2). Petitioner bears the burden of proof.
                                     See Rule 142(a).
                                     II. The All Events Test
                                           A. Introduction
                                        Section 461(a) provides that a deduction must be taken for
                                     the proper taxable year under the taxpayer’s method of
                                     accounting. Accrual method taxpayers generally are allowed
                                     a deduction for the year in which the taxpayer incurred the
                                     expense, regardless of the actual date of payment. Sec.
                                     461(h)(4); sec. 1.461–1(a)(2), Income Tax Regs.; see also
                                     Interex, Inc. v. Commissioner, 321 F.3d 55, 58 (1st Cir. 2003)
                                     (‘‘Accrual method taxpayers may deduct expenses when they
                                     are incurred even if they have not yet been paid[.]’’), aff ’g
                                     T.C. Memo. 2002–57. 38
                                        Whether an accrual method taxpayer has incurred an
                                     expense is determined under the ‘‘all events test’’. See sec.
                                     1.461–1(a)(2)(i), Income Tax Regs. Under the all events test,
                                     ‘‘a liability * * * is incurred, and generally is taken into
                                     account for Federal income tax purposes, in the taxable year
                                     in which all the events have occurred that establish the fact
                                     of the liability, the amount of the liability can be determined
                                     with reasonable accuracy, and economic performance has
                                     occurred with respect to the liability.’’ Id.; see also United
                                     States v. Gen. Dynamics Corp., 481 U.S. 239, 242–243 (1987);
                                     United States v. Anderson, 269 U.S. 422, 441 (1926); Caltex

                                     a qualified revocable trust as defined in sec. 645(b)(1)), sec. 7491(a)(2) re-
                                     quires the taxpayer to establish, among other things, that it meets the re-
                                     quirements of sec. 7430(c)(4)(A)(ii) (which in turn references the net worth
                                     requirements of 28 U.S.C. sec. 2412(d)(2)(B)).
                                       38 Conversely, a taxpayer may not deduct either a prepaid amount or an

                                     amount paid without a legal obligation to do so any earlier than the tax-
                                     able year in which such amount is incurred. Sec. 1.446–1(c)(ii)(B), Income
                                     Tax Regs. Accordingly, we need not consider the amount and timing of
                                     payments petitioner actually made with respect to each of the liabilities
                                     because even if petitioner made such payment during TYE March 31,
                                     2005, petitioner is not entitled to a deduction for the related expense un-
                                     less petitioner also incurred a liability for that expense during TYE March
                                     31, 2005.




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                                     460                 141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     Oil Venture v. Commissioner, 138 T.C. 18, 23 (2012). An
                                     accrual basis taxpayer claiming that it incurred a liability for
                                     Federal income tax purposes must satisfy each of the three
                                     requirements under the all events test in order to claim a
                                     deduction for the liability.
                                        Respondent does not dispute that the second requirement
                                     of the all events test (i.e., that the amount of the liability
                                     was determinable with reasonable accuracy) was satisfied
                                     with respect to the disputed deductions. Rather, respondent
                                     disputes whether the first and third requirements were satis-
                                     fied. With respect to the disputed deductions attributable to
                                     the Marsh, ACS, Schwamm & Frampton, Otis Elevator, and
                                     Q–1 agreements, as well as the insurance premium expense
                                     deduction and the real property and equipment lease expense
                                     deductions, respondent contends that the first requirement of
                                     the all events test was not satisfied because all the events
                                     had not occurred to establish the fact of these liabilities as
                                     of March 31, 2005. With respect to all of the deductions
                                     except the insurance premium expense deduction, respondent
                                     contends that the third requirement (economic performance)
                                     of the all events test was not satisfied because: (1) the 31⁄2-
                                     month rule of section 1.461–4(d)(6)(ii), Income Tax Regs.,
                                     does not apply and (2) petitioner is not entitled to rely on the
                                     recurring item exception to the economic performance
                                     requirement.
                                        Petitioner contends that it satisfied each requirement of
                                     the all events test. Petitioner argues that it satisfied the first
                                     requirement because its execution of the relevant agree-
                                     ments, and assumption of binding legal obligations there-
                                     under, fixed the fact of the liabilities underlying the disputed
                                     deductions. Petitioner also argues that it satisfied the eco-
                                     nomic performance requirement because the recurring item
                                     exception of section 461(h)(3) applies.
                                        We first address respondent’s contention that the fact of
                                     petitioner’s liabilities under the Marsh, ACS, Schwamm &
                                     Frampton, Otis Elevator, and Q–1 agreements, the insurance
                                     premium agreement, and the real property and equipment
                                     rental agreements was not fixed as of the close of the taxable
                                     year in issue. We then analyze whether there was economic
                                     performance with respect to the disputed deductions. If peti-
                                     tioner was entitled to rely on the recurring item exception




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                                     (440)                  VECO CORP. & SUBS. v. COMMISSIONER                                    461


                                     with respect to the disputed deductions, then the economic
                                     performance requirement of the all events test is satisfied.
                                           B. Fact of the Liability
                                        The term ‘‘liability’’ refers to ‘‘any item allowable as a
                                     deduction, cost, or expense for Federal income tax purposes.’’
                                     Sec. 1.446–1(c)(ii)(B), Income Tax Regs. Generally, the fact of
                                     a liability is established on the earlier of: (1) the event fixing
                                     the liability, such as the required performance or (2) the date
                                     the payment is unconditionally due. See Rev. Rul. 2007–3,
                                     2007–1 C.B. 350; Rev. Rul. 80–230, 1980–2 C.B. 169; Rev.
                                     Rul. 79–410, 1979–2 C.B. 213.
                                        Petitioner argues that actual payment of an expense is not
                                     required to establish the fact of the liability. 39 As discussed
                                     supra, an accrual method taxpayer may deduct an expense
                                     for a taxable year before the year in which the taxpayer actu-
                                     ally remits payment provided that the taxpayer incurred the
                                     expense during the taxable year for which it claimed the
                                     deduction. Sec. 461(h)(4); sec. 1.461–1(a)(2), Income Tax
                                     Regs.; see also United States v. Hughes Props. Inc., 476 U.S.
                                     593, 599 (1986); Interex, Inc. v. Commissioner, 321 F.3d at
                                     57–58. ‘‘[A]lthough expenses may be deductible before they
                                     have become due and payable, liability must first be firmly
                                     established.’’ Gen. Dynamics Corp., 481 U.S. at 243. Accord-
                                     ingly, we agree with petitioner that actual payment is not
                                     necessarily required to establish that petitioner’s liability for
                                     an expense is fixed under the all events test.
                                        Petitioner argues that upon its entering into the various
                                     agreements, its liabilities under those agreements became
                                     fixed by virtue of its assumption of the contractual obliga-
                                     tions. Although petitioner and respondent agree that a
                                           39 Petitioner
                                                      also argues that ‘‘courts have repeatedly rejected the Re-
                                     spondent’s arguments that a liability is not fixed until the time has come
                                     for payment of the obligation.’’ Petitioner, however, overstates respondent’s
                                     argument. Respondent contends that all events have occurred to establish
                                     the fact of a taxpayer’s liability upon the earlier of the event fixing the li-
                                     ability or the payment due date. Accordingly, respondent contends that a
                                     liability may be fixed before the payment due date provided that the event
                                     fixing the liability already occurred. Furthermore, in respondent’s answer-
                                     ing brief, respondent specifically acknowledges that ‘‘actual payment is not
                                     required to fix the liability.’’




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                                     462                  141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     statute 40 or regulation sometimes may operate to fix a tax-
                                     payer’s liability, the parties disagree regarding whether peti-
                                     tioner’s execution of each agreement constituted an event
                                     that fixed petitioner’s liability for the entire obligation under
                                     the agreement.
                                        The execution of a contract contemplating payment, with-
                                     out more, is not an event that fixes the payor’s liability. See
                                     Spencer, White & Prentis v. Commissioner, 144 F.2d 45, 47
                                     (2d Cir. 1944) (‘‘It is well settled that deductions may only
                                     be taken for the year in which the taxpayer’s liability to pay
                                     becomes definite and certain, even though the transactions
                                     (such as the contract in the present case) which occasioned
                                     the liability, may have taken place in an earlier year.’’). In
                                     particular, where a contract ‘‘contains mutually dependent
                                     promises, liability under it is contingent upon performance or
                                     tendered performance’’, and is not fixed by merely entering
                                     into the contract. Levin v. Commissioner, 219 F.2d 588, 589
                                     (3d Cir. 1955), aff ’g 21 T.C. 996 (1954); see also Gulf Oil
                                     Corp. v. Commissioner, 914 F.2d 396, 409 (3d Cir. 1990)
                                     (‘‘Unconditional liability under an executory contract is not
                                     created until at least one party performs.’’), aff ’g 86 T.C. 115
                                     (1986). For example, this Court has held that taxpayers who
                                     entered into a contract in year 1 for the provision of services
                                     in years 1 and 2 were not entitled to deduct the entire
                                     amount of the contract price in year 1 because they had not
                                     incurred the entire amount of the liability in year 1. Levin
                                     v. Commissioner, 21 T.C. 996. 41 In so holding, this Court
                                           40 Furthermore,
                                                         this Court has held that the fact that a liability is fixed
                                     by statute does not control whether the liability is fixed for purposes of the
                                     all events test. See Chrysler Corp. v. Commissioner, T.C. Memo. 2000–283,
                                     aff ’d, 436 F.3d 644 (6th Cir. 2006).
                                       41 In Levin v. Commissioner, 21 T.C. 996 (1954), aff ’d, 219 F.2d 588 (3d

                                     Cir. 1955), the taxpayers were partners in a business that manufactured,
                                     produced, and sold food products. On December 12, 1946, the business en-
                                     tered into an advertising contract with a two-year term. Id. at 996–997.
                                     Under the terms of the contract, the taxpayers were to pay the advertising
                                     agent $733 per month in exchange for the advertisement of their food
                                     products. Id. On December 17, 1946, the advertising agent sent to the tax-
                                     payers an invoice for services rendered from December 5, 1946, to Decem-
                                     ber 4, 1947. Id. at 997. The partnership, which used an accrual method
                                     of accounting, accrued the entire amount of the invoice on its books for the
                                     TYE December 31, 1946, although the partnership did not begin making
                                     payments on the invoice until February 10, 1947. Id.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    463


                                     stated that ‘‘it has been well established that the accrual
                                     method of accounting does not permit the anticipation in the
                                     taxable year of future expenses in other years prior to the
                                     rendition of the services fixing the liability for which the pay-
                                     ment is to be made.’’ Id. at 999.
                                        Petitioner cites numerous cases that it claims stand for the
                                     proposition that the execution of a contract fixes a taxpayer’s
                                     liability for the entire amount of the contract price. 42 None
                                     of the cases, however, stand for the proposition that the
                                     execution of a contract, without more, establishes the fact of
                                     the taxpayer’s liability for the entire amount due under the
                                     contract. Rather, in each of the cited cases, the court exam-
                                     ined the relevant contract to decide when the liability
                                     became fixed. See Commissioner v. H.B. Ives Co., 297 F.2d
                                     229 (2d Cir. 1961), rev’g T.C. Memo. 1959–187; Willoughby
                                     Camera Stores, Inc. v. Commissioner, 125 F.2d 607, 608–609
                                     (2d Cir. 1942), rev’g 44 B.T.A. 520 (1941); Helvering v. Rus-

                                         The Court held that the partnership was not entitled to accrue the en-
                                     tire amount of the invoice for Federal income tax purposes. Id. at 998–999.
                                     In so holding, the Court stated that under the contract the taxpayers ‘‘in-
                                     curred no liability but merely agreed to become liable to pay in the event
                                     the future services called for were performed.’’ Id. at 998. The Court fur-
                                     ther acknowledged that the measure of an obligation to pay for future
                                     services was not the contract price but rather ‘‘a contingent response in
                                     damages’’ for breach of the contract. Id. at 998–999. The U.S. Court of Ap-
                                     peals for the Third Circuit affirmed the decision of this Court, stating that
                                     ‘‘[r]endition of the services was a condition precedent to any obligation of
                                     the partnership to pay.’’ Levin v. Commissioner, 219 F.2d at 589.
                                         42 Petitioner also cites Amalgamated Hous. Corp. v. Commissioner, 37

                                     B.T.A. 817 (1938), aff ’d, 108 F.2d 1010 (2d Cir. 1940), in support of this
                                     contention. In particular, petitioner contends that in Amalgamated Hous.
                                     Corp., the Court held that the taxpayer’s liability for service payments was
                                     not fixed because the taxpayer had not entered into a binding contract
                                     with a service provider and the services were not yet required under State
                                     housing law. In Amalgamated Hous. Corp. v. Commissioner, 37 B.T.A. at
                                     829, the taxpayers were required under State law to make renovations at
                                     the end of particular periods of months and accordingly ‘‘set up a reserve
                                     from the rent received during that period sufficient to pay for’’ the renova-
                                     tions. The Court held the taxpayers could not accrue the renovation costs
                                     as expenses before the end of the relevant period, as defined by State law,
                                     or the time that renovation services were rendered. Id. The Court did not
                                     discuss the effect, if any, of the taxpayers’ lack of a service contract under
                                     which a third party agreed to provide renovation services. Amalgamated
                                     Hous. Corp. does not stand for the proposition for which it is cited by peti-
                                     tioner.




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                                     464                  141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     sian Fin. & Constr. Corp., 77 F.2d 324, 327 (2d Cir. 1935);
                                     Wash. Post Co. v. United States, 405 F.2d 1279, 1283 (Ct. Cl.
                                     1969); Burnham Corp. v. Commissioner, 90 T.C. 953, 957–
                                     958 (1988), aff ’d, 878 F.2d 86 (2d Cir. 1989); Ill. Power Co.
                                     v. Commissioner, 87 T.C. 1417, 1443–1447 (1986); Champion
                                     Spark Plug Co. v. Commissioner, 30 T.C. 295, 298 (1958),
                                     aff ’d, 266 F.2d 347 (6th Cir. 1959). The cited cases are
                                     distinguishable as explained below.
                                        Two of the cases address the treatment of payments made
                                     under a unilateral contract. See Burnham Corp. v. Commis-
                                     sioner, 90 T.C. 953; 43 Champion Spark Plug Co. v. Commis-
                                     sioner, 30 T.C. 295. 44 The agreements at issue here are not
                                     unilateral; each party is obligated to perform the under-
                                     takings specified therein, and petitioner is required to make
                                     payments over the term of the contract in exchange for goods
                                     or services to be provided.
                                        Three of the cases involve situations where the required
                                     performance from one of the contracting parties occurred in
                                     one taxable year but the other contracting party did not actu-
                                     ally make the associated payment until the following taxable
                                     year. Willoughby Camera Stores, Inc. v. Commissioner, 125
                                     F.2d at 608–609; Helvering v. Russian Fin. & Constr. Corp.,
                                     77 F.2d at 327; Wash. Post Co., 405 F.2d at 1283. In contrast,
                                     the required performance under the agreements to which the
                                     disputed deductions relate was not supposed to occur, and in
                                     fact did not occur, until after the close of petitioner’s TYE
                                     March 31, 2005.
                                        One of the cases, Commissioner v. H.B. Ives Co., 297 F.2d
                                     at 229–230, is not relevant to the issues before the Court as
                                           43 BurnhamCorp. v. Commissioner, 90 T.C. 953 (1988), aff ’d, 878 F.2d
                                     86 (2d Cir. 1989), involved a contract under which the taxpayer agreed to
                                     make monthly payments for the remainder of an individual’s life. The
                                     Court held that the taxpayer was entitled to deduct the present value of
                                     the payments for the entirety of the contract term in the taxable year in
                                     which the taxpayer entered into the contract. Id. at 957–958.
                                        44 Champion Spark Plug Co. v. Commissioner, 30 T.C. 295, 297 (1958),

                                     aff ’d, 266 F.2d 347 (6th Cir. 1959), involved a unilateral contract under
                                     which the taxpayer agreed to make semimonthly payments to a disabled
                                     former employee for a multiyear period. The Court found that the taxpayer
                                     was entitled to deduct the value of the payments to be made over the en-
                                     tire period in the taxable year in which the taxpayer entered into the con-
                                     tract. Id. at 298.




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                                     (440)                  VECO CORP. & SUBS. v. COMMISSIONER                                    465


                                     it involves a deduction claimed for year 1 under a contract
                                     that was not executed until year 2.
                                        The other case petitioner cites, Ill. Power Co. v. Commis-
                                     sioner, 87 T.C. at 1443–1447, actually supports respondent’s
                                     argument that the fact of the liability is established upon the
                                     occurrence of either the required performance or the payment
                                     due date. Ill. Power Co. v. Commissioner, 87 T.C. at 1445,
                                     involved a lease agreement under which the taxpayer agreed
                                     to make lease payments either monthly, as the taxpayer’s
                                     nuclear power plant became operational, or at the termi-
                                     nation of the lease agreement, which would occur in 40
                                     years. Id. The taxpayer elected to defer its lease payments
                                     for 1981 until the plant became operational; however, the
                                     taxpayer accrued an amount equal to its monthly lease
                                     obligation for 1981 and deducted the amount on its 1981
                                     return. Id. at 1428, 1445. This Court upheld the claimed
                                     deduction, stating:
                                             Whether the lease payments are made as Monthly Lease Charges, as
                                           the plant becomes operational, or as of the termination of the Lease
                                           Agreement, it is clear that in all events, the payments must be made.
                                           That petitioner elected to defer payments of the charges until the plant
                                           becomes operational is of no significance. The election merely affects the
                                           timing and not the certainty of payment of the accrued charge. * * * [Id.
                                           at 1445.]

                                     Because the lease agreement provided that the taxpayer had
                                     an unconditional liability to pay the lease obligations as they
                                     accrued each month, the Court held that the taxpayer was
                                     entitled to deduct those obligations as they accrued even if
                                     the taxpayer did not pay the lease obligations until later. The
                                     holding is consistent with the general proposition that a tax-
                                     payer may deduct a liability as an expense before payment
                                     is made so long as the event fixing the liability (in Ill. Power
                                     Co., performance under the lease agreement) has occurred.
                                     See also Eastman Kodak Co. v. United States, 534 F.2d 252,
                                     259–260 (Ct. Cl. 1976).
                                        Although petitioner’s execution of the agreements in issue
                                     does not establish the fact of the liabilities, the terms of the
                                     agreements are relevant in deciding whether and when the
                                     liabilities became fixed under the all events test. See supra
                                     pp. 462–463; see also Decision, Inc. v. Commissioner, 47 T.C.
                                     58 (1966). We analyze each of the relevant agreements to




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                                     466                 141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     identify the earlier of when the required performance
                                     occurred or when petitioner’s payment was unconditionally
                                     due.
                                           1. Service Contracts
                                        An accrual method taxpayer may not deduct an expense
                                     attributable to a bilateral service contract before performance
                                     of the services under the contract occurs. Nat’l Bread Wrap-
                                     ping Mach. Co. v. Commissioner, 30 T.C. 550, 556 (1958)
                                     (‘‘The accrual method does not permit the anticipation of
                                     future expenses prior to the rendition of the services for
                                     which the payment is due.’’); Levin v. Commissioner, 21 T.C.
                                     at 998; Amalgamated Hous. Corp. v. Commissioner, 37 B.T.A.
                                     817, 829 (1938), aff ’d, 108 F.2d 1010 (2d Cir. 1940); see also
                                     Levert v. Commissioner, T.C. Memo. 1989–333; Rev. Rul. 80–
                                     182, 1980–2 C.B. 167.
                                           a. Marsh Agreement
                                       The event fixing a liability under a service contract is the
                                     performance of the services. See, e.g., Levin v. Commissioner,
                                     21 T.C. at 998. As relevant here, under the agreement Marsh
                                     agreed to provide VECO Corp. with various insurance
                                     brokerage and consulting services during the period from
                                     January 10 through December 31, 2005, in exchange for the
                                     payment by VECO Corp. of an annual fixed fee of $300,000.
                                     The $300,000 fee was payable in installments with $75,000
                                     due on February 1, 2005, and four additional payments,
                                     totaling $225,000, due on dates either on or after April 1,
                                     2005. 45
                                       The portion of the fee in dispute, $225,000, was not due
                                     under the agreement until on or after April 1, 2005. Accord-
                                     ingly, the $225,000 qualifies as an established liability
                                     during petitioner’s TYE March 31, 2005, only if Marsh per-
                                     formed the required services under the agreement on or
                                     before March 31, 2005. Petitioner has failed to prove that
                                       45 The Marsh agreement does not provide for VECO Corp. to make pay-

                                     ments in equal amounts. However, the payment schedule shows that
                                     VECO Corp. was to make payments of $75,000, or multiple amounts equal
                                     to $75,000, for each quarter. We infer from this payment schedule that
                                     VECO Corp. was to make payments to Marsh as the services were pro-
                                     vided.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    467


                                     Marsh provided all of the contracted-for services to VECO
                                     Corp. by March 31, 2005.
                                        VECO Corp. was required to make a $75,000 payment for
                                     services rendered during the period January 10 to March 31,
                                     2005, which petitioner properly deducted. However, VECO
                                     Corp. was not required to pay the $225,000 amount by
                                     March 31, 2005. As there is no credible evidence that either
                                     (i) the services required under the contract for the period
                                     after March 31, 2005, had been provided by March 31, 2005,
                                     or (ii) petitioner had an obligation to pay the $225,000 before
                                     March 31, 2005, the fact of the liability for the $225,000 peti-
                                     tioner deducted was not established by the close of peti-
                                     tioner’s TYE March 31, 2005.
                                           b. ACS Agreement
                                        Petitioner failed to introduce a copy of the service agree-
                                     ment between ACS and VECO Alaska or any other evidence
                                     to show the performance required of ACS under the contract.
                                     While we infer from the record that ACS provided services
                                     to VECO Alaska, we are unable to make a finding as to
                                     whether performance under the ACS agreement had occurred
                                     by the close of TYE March 31, 2005.
                                        We also infer from the record that VECO Alaska made
                                     monthly payments to ACS. See supra note 16. The parties
                                     agree that the disputed deduction is attributable to monthly
                                     expenses under the agreement for the period April 1 to
                                     December 31, 2005. At best, payment of the expense gener-
                                     ating the disputed deduction was not due until the beginning
                                     of each month and accordingly, was not unconditionally due
                                     until after March 31, 2005. Petitioner has failed to show that
                                     the fact of the liability was established by the close of peti-
                                     tioner’s TYE March 31, 2005.
                                           c. Schwamm & Frampton Agreement
                                       Under the agreement Schwamm & Frampton agreed to
                                     provide property management services and to act as agent
                                     for VECO Properties, in exchange for monthly payments by
                                     VECO Properties that were due when it received rent for the
                                     month. The disputed deduction is attributable to expenses of
                                     $6,250 for services provided by Schwamm & Frampton in




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                                     468                  141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     April 2005. VECO Properties’ payment of $6,250 was not
                                     unconditionally due until on or after April 1, 2005.
                                        Neither the performance of the services nor the payment
                                     due date occurred before March 31, 2005. Accordingly, the
                                     fact of the liability was not established by the close of peti-
                                     tioner’s TYE March 31, 2005.
                                           d. Otis Elevator Agreement
                                       Under the agreement Schwamm & Frampton, as agent for
                                     VECO Properties, agreed to pay Otis Elevator a monthly
                                     service fee of $1,950. 46 The terms of the agreement provided
                                     that payments would be made quarterly, with each quarterly
                                     payment made ‘‘on or before the last day of the month prior
                                     to the billing period, beginning on the Commencement Date.’’
                                     The agreement further provided for a commencement date of
                                     February 1, 2002.
                                       The disputed deduction, $16,575, was attributable to
                                     expenses under the Otis Elevator agreement for the period
                                     April 1 to December 15, 2005. Therefore, petitioner’s liability
                                     for the amount was fixed only if payment of that amount was
                                     unconditionally due on or before March 31, 2005.
                                       Under the agreement VECO Properties was required to
                                     make quarterly payments on or before January 31, April 30,
                                     July 31, and October 31. The advance payment due on or
                                     before January 31, 2005, was for services to be rendered
                                     during February, March, and April 2005. VECO Properties
                                     was not required to make another payment until April 30,
                                     2005, at which time VECO Properties would pay for services
                                     to be rendered during May, June, and July 2005.
                                           46 Respondent
                                                      contends that petitioner is not entitled to a deduction for
                                     expenses under the Otis Elevator agreement because: (1) neither VECO
                                     Corp. nor VECO Properties made any direct payments to Otis Elevator
                                     and (2) neither VECO Corp. nor VECO Properties was a party to the con-
                                     tract with Otis Elevator. Although neither VECO Corp. nor VECO Prop-
                                     erties made any direct payments to Otis Elevator, petitioner is entitled to
                                     deduct expenses attributable to liabilities incurred during TYE March 31,
                                     2005, such as the Otis Elevator monthly service fees. See, e.g., United
                                     States v. Gen. Dynamics Corp., 481 U.S. 239, 243 (1987); United States v.
                                     Hughes Props., Inc., 476 U.S. 593, 599 (1986). In addition, while neither
                                     VECO Corp. nor VECO Properties was a party to the Otis Elevator agree-
                                     ment, Schwamm & Frampton, the agent of VECO Properties, entered into
                                     the Otis Elevator agreement at the direction of VECO Properties.




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                                     (440)                  VECO CORP. & SUBS. v. COMMISSIONER                                    469


                                       Because the obligation to pay for the services to be ren-
                                     dered during April 2005 was unconditionally due on January
                                     31, 2005, 47 $1,950 of the disputed deduction, attributable to
                                     services provided in April 2005, was fixed during petitioner’s
                                     TYE March 31, 2005. See, e.g., sec. 1.446–1(c)(ii)(B), Income
                                     Tax Regs. The remaining disputed amount attributable to
                                     services provided from May 1 to December 15, 2005, how-
                                     ever, was not fixed during TYE March 31, 2005, because pay-
                                     ment for such services was not unconditionally due until
                                     after March 31, 2005.
                                           e. Q–1 Agreement
                                       Under the agreement Q–1 agreed to provide maintenance
                                     services to VECO Properties and VECO Properties agreed to
                                     pay Q–1 a monthly fee of $9,984 ‘‘in arrears, on the tenth
                                     day of the following month.’’ The disputed deduction,
                                     $59,940, relates to expenses incurred under the Q–1 agree-
                                     ment for services provided during the period April 1 to
                                     October 15, 2005. Neither the performance of the services nor
                                     the payment due date occurred before the close of petitioner’s
                                     taxable year. Accordingly, the fact of the liability was not
                                     established by the close of petitioner’s TYE March 31, 2005.
                                           2. Insurance Premium Agreement
                                       For purposes of the all events test, the deductibility of
                                     expenses under an insurance contract generally is reviewed
                                     in the same manner as the deductibility of expenses under
                                     a service contract. See, e.g., Rev. Rul. 2007–3, supra. Under
                                     VECO Corp.’s commercial premium finance agreement with
                                     Marsh, VECO Corp. agreed to make monthly premium pay-
                                     ments beginning May 1, 2005, for coverage during the period
                                     April 1, 2005, to March 31, 2006. 48 Performance of the serv-
                                           47 Petitioner
                                                     is not entitled to treat this liability as incurred any earlier
                                     than the taxable year in which economic performance occurs. See sec.
                                     461(h)(1); sec. 1.461–4(a)(1), Income Tax Regs. We discuss the economic
                                     performance requirement with respect to this liability infra part II.C.
                                        48 As noted supra pp. 461–462, the mere execution of a contract is insuf-

                                     ficient to establish the fact of the taxpayer’s liability. Accordingly, peti-
                                     tioner may not rely on the existence of the insurance premium contract to
                                     support its claimed deduction. Furthermore, VECO Corp. did not enter
                                     into the insurance premium contract until April 28, 2005, after the close
                                                                                                       Continued




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                                     470                 141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     ices did not occur and payment for the services was not due
                                     before March 31, 2005. Accordingly, the fact of the liability
                                     was not established by the close of petitioner’s TYE March
                                     31, 2005.
                                           3. Equipment and Real Estate Rental Agreements
                                        The fact of the liability of a rental expense is established
                                     as each rent payment becomes due. Consol. Foods Corp. v.
                                     Commissioner, 66 T.C. 436, 443 (1976); see also Rod Realty
                                     Co. v. Commissioner, T.C. Memo. 1967–49. Under all of the
                                     real estate rental leases, with the exception of the Bay Street
                                     lease, VECO Corp. or its subsidiaries agreed to make a rent
                                     payment for each monthly rental period either: (1) on the
                                     first day of that month or (2) ‘‘on or before’’ the first day of
                                     that month. The disputed deductions attributable to these
                                     leases relate to the rental of property on or after April 1,
                                     2005. Under the lease agreements the rent payments for
                                     April 2005 were not unconditionally due until April 1, 2005,
                                     and the rent payments for the remainder of 2005 were not
                                     due until after April 1, 2005. Accordingly, the fact of these
                                     liabilities was not established by the close of petitioner’s TYE
                                     March 31, 2005.
                                        Under the Bay Street lease VECO USA agreed to make
                                     monthly rental payments in advance of the first day of each
                                     month. The disputed deduction, $294,696, is attributable to
                                     the rental period April 1 to December 15, 2005. VECO USA’s
                                     rent payment for April 2005 was due on or before March 31,
                                     2005. Accordingly, the fact of the liability for the $33,990
                                     rent payment for the period April 2005 was established
                                     before the close of petitioner’s TYE March 31, 2005, because
                                     the rent payment was unconditionally due on March 31,
                                     2005. 49 See, e.g., sec. 1.446–1(c)(ii)(B), Income Tax Regs.
                                     Petitioner is not entitled to deduct any amount attributable
                                     to rent for the period May 1 to December 15, 2005, because
                                     the rent payments were not due until after the close of peti-
                                     tioner’s TYE March 31, 2005. Therefore, the fact of peti-
                                     of petitioner’s TYE March 31, 2005.
                                        49 Petitioner is not entitled to treat the amount of this liability as in-

                                     curred any earlier than the taxable year in which economic performance
                                     occurs. See sec. 461(h)(1); sec. 1.461–4(a)(1), Income Tax Regs. We discuss
                                     the economic performance requirement with respect to this liability infra
                                     part II.C.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    471


                                     tioner’s liability for these payments was not established
                                     during petitioner’s TYE March 31, 2005.
                                        Under the IKON equipment lease VECO Services agreed to
                                     make monthly rent payments of $25,785, with the first pay-
                                     ment due on or before the effective date and the remaining
                                     payments due on the same day each month thereafter. Peti-
                                     tioner has failed to introduce evidence to prove the effective
                                     date of the IKON equipment lease. See supra note 32.
                                     Accordingly, we are unable to find that the rent payments for
                                     which the disputed deduction was claimed were due on or
                                     before March 31, 2005. Petitioner has failed to prove that the
                                     fact of its liability under the IKON equipment lease was
                                     established by the close of petitioner’s TYE March 31, 2005.
                                           C. Economic Performance and the Recurring Item Excep-
                                              tion
                                           1. Introduction
                                        Section 461(h)(1) provides that ‘‘in determining whether an
                                     amount has been incurred with respect to any item during
                                     any taxable year, the all events test shall not be treated as
                                     met any earlier than when economic performance with
                                     respect to such item occurs.’’ 50 If the liability is attributable
                                     to the provision of services or property to the taxpayer by
                                     another person, economic performance occurs as the person
                                     provides such services or property. Sec. 461(h)(2)(A)(i) and
                                     (ii); see also sec. 1.461–4(d)(2), Income Tax Regs. If the
                                     liability is attributable to ‘‘the use of property by the tax-
                                     payer, economic performance occurs as the taxpayer uses
                                     such property.’’ 51 Sec. 461(h)(2)(A)(iii); see also sec. 1.461–
                                     4(d)(3), Income Tax Regs. However, ‘‘a taxpayer is permitted
                                     to treat services or property as provided to the taxpayer as
                                     the taxpayer makes payment to the person providing the
                                     services or property * * * if the taxpayer can reasonably
                                       50 Sec. 1.461–1(a)(2)(iii)(B), Income Tax Regs., provides examples of li-

                                     abilities that are not subject to the economic performance requirement,
                                     none of which is relevant here. See sec. 1.461–4(b), Income Tax Regs.
                                       51 The economic performance principles relating to the provision of serv-

                                     ices or property to the taxpayer, or the use of property by the taxpayer,
                                     do not apply to certain liabilities, including, among other things, interest
                                     expenses and liabilities arising under a worker’s compensation act or out
                                     of any tort or breach of contract claim. See sec. 1.461–4(d)(1), Income Tax
                                     Regs.




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                                     expect the person to provide the services or property within
                                     31⁄2 months after the date of payment.’’ Sec. 1.461–4(d)(6)(ii),
                                     Income Tax Regs. Petitioner has conceded that it did not sat-
                                     isfy the 31⁄2-month rule of section 1.461–4(d)(6)(ii), Income
                                     Tax Regs., for any of the deductions in issue. 52
                                        Section 461(h)(3) provides an exception (the recurring item
                                     exception) to the general rule requiring economic perform-
                                     ance. Under the recurring item exception, a taxpayer may
                                     treat an item as incurred during any taxable year if:
                                             (i) the all events test with respect to such item is met during such tax-
                                           able year (determined without regard to * * * [section 461(h)(1)]),
                                             (ii) economic performance with respect to such item occurs within the
                                           shorter of—
                                                (I) a reasonable period after the close of such taxable year, or
                                                (II) 81⁄2 months after the close of such taxable year,
                                             (iii) such item is recurring in nature and the taxpayer consistently
                                           treats items of such kind as incurred in the taxable year in which the
                                           requirements of clause (i) are met, and
                                             (iv) either—
                                                (I) such item is not a material item, or
                                                (II) the accrual of such item in the taxable year in which the
                                             requirements of clause (i) are met results in a more proper match
                                             against income than accruing such item in the taxable year in which
                                             economic performance occurs.
                                             [Sec. 461(h)(3)(A).]

                                     See also sec. 1.461–5, Income Tax Regs.
                                        Respondent contends that petitioner failed to satisfy the
                                     economic performance requirement and the materiality or
                                     matching requirement of the recurring item exception for all
                                     of the disputed deductions. Petitioner disagrees. In par-
                                     ticular, petitioner contends that economic performance with
                                     respect to each expense item occurred within 81⁄2 months
                                     after the close of its TYE March 31, 2005, as specified in sec-
                                        52 Sec. 461(h) also provides a general rule for economic performance, de-

                                     scribed supra p. 458. Under the general rule, petitioner is entitled to de-
                                     duct for TYE March 31, 2005, the payments it made during that year for
                                     services actually performed and property actually received during that
                                     year. See, e.g., Caltex Oil Venture v. Commissioner, 138 T.C. 18, 38 (2012).
                                     The only amounts in dispute are those attributable to deductions peti-
                                     tioner claimed on its TYE March 31, 2005, return for services performed
                                     and property received after March 31, 2005. Accordingly, economic per-
                                     formance with respect to the portions of the deductions in dispute did not
                                     occur until after the close of petitioner’s TYE March 31, 2005. See sec.
                                     461(h)(2)(A).




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                                     (440)                  VECO CORP. & SUBS. v. COMMISSIONER                                    473


                                     tion 461(h)(3)(A)(ii)(II), and that each expense item is not
                                     material within the meaning of section 461(h)(3)(A)(iv)(I).
                                     Petitioner concedes that it did not satisfy the matching
                                     requirement for any of the disputed deductions, with the
                                     exception of its insurance premium expense deduction.
                                        The deductions remaining at issue are the deductions
                                     claimed with respect to the Aspen, Primavera, Surveyor’s
                                     Exchange, and Invensys agreements, and the deductions
                                     claimed with respect to services and property provided to
                                     petitioner during April 2005 under the Otis Elevator agree-
                                     ment and the Bay Street lease. We examine the record to see
                                     whether petitioner has proven that: (1) each item in dispute
                                     is not material, see sec. 461(h)(3)(A)(iv)(I), and/or (2) eco-
                                     nomic performance with respect to each item in dispute
                                     occurred within the shorter of a reasonable period after the
                                     close of petitioner’s TYE March 31, 2005, or within 81⁄2
                                     months after the close of petitioner’s TYE March 31, 2005,
                                     see sec. 461(h)(3)(A)(ii).
                                           2. Materiality Requirement
                                        In making a determination regarding the materiality of an
                                     item under section 461(h)(3)(A)(iv), the treatment of an item
                                     on financial statements shall be taken into account. Sec.
                                     461(h)(3)(B). Section 1.461–5(b)(4), Income Tax Regs., also
                                     addresses the materiality requirement 53 and provides the
                                     following general principles:
                                             (i) In determining whether a liability is material, consideration shall
                                           be given to the amount of the liability in absolute terms and in relation
                                           to the amount of other items of income and expense attributable to the
                                           same activity.
                                             (ii) A liability is material if it is material for financial statement pur-
                                           poses under generally accepted accounting principles.
                                             (iii) A liability that is immaterial for financial statement purposes
                                           under generally accepted accounting principles may be material for pur-
                                           poses of this paragraph * * *

                                        53 The Financial Standards Accounting Board (FASB) defines materiality

                                     as ‘‘[t]he magnitude of an omission or misstatement of accounting informa-
                                     tion that, in the light of surrounding circumstances, makes it probable that
                                     the judgment of a reasonable person relying on the information would have
                                     been changed or influenced by the omission or misstatement.’’ Statement
                                     of Financial Accounting Concepts No. 2, ‘‘Qualitative Characteristics of Ac-
                                     counting Information’’ (1980) (SFAC No. 2).




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                                     474                  141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     We glean from these principles that although a liability is
                                     material for purposes of the recurring item exception if it is
                                     material for financial statement purposes, a liability that is
                                     not material for financial statement purposes may still be
                                     material for purposes of the recurring item exception. See,
                                     e.g., United States v. Stover, 731 F. Supp. 2d 887, 892 (W.D.
                                     Mo. 2010), aff ’d, 650 F.3d 1099 (8th Cir. 2011). 54
                                        Section 461 does not define when an item is material
                                     under the recurring item exception; it simply provides that
                                     in determining materiality, an item’s treatment on financial
                                     statements must be taken into account. Sec. 461(h)(3)(B).
                                     The legislative history accompanying the enactment of the
                                     recurring item exception, however, provides an example of
                                     how the materiality of an item should be analyzed:
                                           For example, assume that a calendar-year taxpayer enters into a one-
                                           year maintenance contract on July 1, 1985. If the amount of the expense
                                           is prorated between 1985 and 1986 for financial statement purposes, it
                                           also should be prorated for tax purposes. If, however, the full amount is
                                           deducted in 1985 for financial statement purposes because it is not
                                           material under generally accepted accounting principles, it may (or may
                                           not) be considered an immaterial item for purposes of this exception.
                                           [H.R. Conf. Rept. No. 98–861, at 874 (1984), 1984–3 C.B. (Vol. 2) 1, 128.]

                                     See also Staff of J. Comm. on Taxation, General Explanation
                                     of the Revenue Provisions of the Deficit Reduction Act of
                                     1984, at 263 (J. Comm. Print 1984). We draw from section
                                     461(h)(3)(B) and from the example a conclusion: If a taxpayer
                                     prorates a liability arising under a contract over two or more
                                     taxable years for financial statement purposes but takes an
                                     inconsistent position on its tax returns, the liability is mate-
                                     rial.
                                       Petitioner prepared its financial statements in accordance
                                     with GAAP. On its financial statements petitioner accrued
                                           54 A
                                             liability also is material if it is significant in amount. See sec. 1.461–
                                     5(b)(4)(i), Income Tax Regs.; see also United States v. Stover, 731 F. Supp.
                                     2d 887, 892 (W.D. Mo. 2010) (analyzing the amount of the expense, the re-
                                     lationship between the expense and the taxpayer’s revenue, and the mate-
                                     riality of the amount and nature of the expense for financial statement
                                     purposes in deciding whether an expense was material under sec.
                                     461(h)(3)(A)(iv)(I)), aff ’d, 650 F.3d 1099 (8th Cir. 2011); Rev. Rul. 2012–
                                     1, 2012–2 I.R.B. 255. However, the FASB has stated that ‘‘[m]agnitude by
                                     itself, without regard to the nature of the item and the circumstances in
                                     which the judgment has to be made, will not generally be a sufficient basis
                                     for a materiality judgment.’’ SFAC No. 2.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    475


                                     its liabilities under the Aspen, Primavera, Surveyor’s
                                     Exchange, Invensys, and Otis Elevator agreements and the
                                     Bay Street lease over more than one year for financial state-
                                     ment purposes. On its FYE March 31, 2006, financial
                                     statement, petitioner treated the disputed deductions as
                                     expenses for that year but deducted the expenses on its tax
                                     return for TYE March 31, 2005. Guided by section
                                     461(h)(3)(B) and the example in the conference report, we
                                     conclude that the liabilities giving rise to the disputed deduc-
                                     tions are material because petitioner prorated the liabilities
                                     between two years on its financial statements and took an
                                     inconsistent position with respect to the liabilities for finan-
                                     cial statement and tax reporting purposes.
                                        Petitioner bears the burden of showing that the liabilities
                                     attributable to the disputed deductions are not material
                                     under section 1.461–5(b)(4), Income Tax Regs. Although peti-
                                     tioner contends that the liabilities were not material in
                                     amount for financial statement purposes, petitioner only
                                     introduced calculations that compare the disputed deductions
                                     to gross receipts. Petitioner neither offered any analysis
                                     regarding how the liabilities at issue compared in amount or
                                     relative importance to similar types of expenses nor
                                     addressed the fact that the disputed deductions resulted from
                                     a requested change in accounting method. 55
                                        Even if we were to find that the amount of the liabilities
                                     was immaterial for financial statement purposes, ‘‘[a]
                                     liability that is immaterial for financial statement purposes
                                     under generally accepted accounting principles may be mate-
                                     rial’’ for purposes of the recurring item exception. See sec.
                                     1.461–5(b)(4)(iii), Income Tax Regs. The disputed items
                                     resulted from a change of accounting method, which was dis-
                                        55 Additionally, the FASB has noted that an item that is too small in

                                     amount to be considered material may be material if it arises in abnormal
                                     circumstances. SFAC No. 2. The liabilities in dispute arose in abnormal
                                     circumstances, i.e., during the year in which petitioner proposed a change
                                     in its accounting method. Petitioner’s treatment of the liabilities for tax
                                     purposes also shows abnormal circumstances given that: (1) petitioner did
                                     not treat the liabilities the same way for financial statement purposes and
                                     (2) petitioner’s treatment of the liabilities as expenses for its TYE March
                                     31, 2005, does not result in a matching of income and expenses since peti-
                                     tioner did not accelerate the income attributable to the accelerated ex-
                                     penses.




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                                     476                 141 UNITED STATES TAX COURT REPORTS                                   (440)


                                     closed on petitioner’s financial statement, and the disputed
                                     items were treated inconsistently for financial accounting
                                     and tax reporting purposes. In addition, the liabilities giving
                                     rise to the deductions were accrued over more than one tax-
                                     able year. Under these circumstances, the liabilities gener-
                                     ating the accelerated deductions were material for tax pur-
                                     poses.
                                        Petitioner had the burden of proving that the disputed
                                     items were not material within the meaning of section
                                     461(h)(3)(A)(iv)(I) and section 1.461–5(b)(4), Income Tax
                                     Regs., and it did not do so. Accordingly, we hold that peti-
                                     tioner may not use the recurring item exception to accrue
                                     and deduct its liabilities under the Aspen, Primavera, Sur-
                                     veyor’s, Invensys, and Otis Elevator agreements, or its
                                     liability under the Bay Street lease, for periods after March
                                     31, 2005, on petitioner’s income tax return for TYE March
                                     31, 2005. In the light of our holding, we need not consider
                                     whether the other requirements of the recurring item excep-
                                     tion described in section 461(h)(3)(A) have been met.
                                     III. Conclusion
                                        Because neither the required performances nor the pay-
                                     ment due dates with respect to the majority of the acceler-
                                     ated deductions occurred before the close of petitioner’s TYE
                                     March 31, 2005, petitioner failed to satisfy the first require-
                                     ment of the all events test of section 461; i.e., petitioner
                                     failed to prove that all of the events had occurred to establish
                                     the fact of the liabilities under section 1.461–1(a)(2)(i),
                                     Income Tax Regs. With respect to the remaining accelerated
                                     deductions, petitioner did not satisfy all of the requirements
                                     for the recurring item exception under section 461(h)(3) and,
                                     consequently, is not excepted from the general rule of section
                                     461(h)(1) requiring economic performance, because the liabil-
                                     ities underlying the deductions were prorated over more than
                                     one taxable year, were treated inconsistently for financial
                                     statement and tax purposes, and were material items for tax
                                     purposes within the meaning of section 461(h)(3)(A)(iv)(I).
                                     See sec. 1.461–5(b)(4), Income Tax Regs.




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                                     (440)                 VECO CORP. & SUBS. v. COMMISSIONER                                    477


                                           To reflect the foregoing,
                                                                          Decision will be entered for respondent.
                                                                               f




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