                          115 T.C. No. 1



                    UNITED STATES TAX COURT



TUTOR-SALIBA CORPORATION, A CALIFORNIA CORPORATION, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 3110-98.                       Filed July 17, 2000.



         Under the Tax Reform Act of 1986, Pub. L. 99-514,
    100 Stat. 2085, Congress changed the reporting method
    for long-term contracts from the completed contract
    method to the percentage of completion method. Under
    the percentage of completion method of sec. 460(b),
    I.R.C., taxpayers are required to include in income
    during the years of construction a portion of the
    “estimated contract price.” In promulgating sec.
    1.460-6(c)(2)(vi), Income Tax Regs., the Secretary
    concluded that the term “estimated contract price”
    includes amounts related to contingent rights and
    obligations, regardless of whether the “all events
    test” has been met. R, relying on the plain meaning of
    the statute and its legislative history, contends that
    the regulation is a valid interpretation of the statute
    that satisfies congressional intent. P contends that
    the all events test is a fundamental tax principle that
    cannot be ignored without an express mandate from
    Congress.
                                  - 2 -

            Held: Sec. 1.460-6(c)(2)(vi), Income Tax Regs.,
       is a reasonable interpretation of the statute, comports
       with the legislative history, and, accordingly, is
       valid.


       Marilyn Barrett, for petitioner.

       Steven M. Roth and Jonathan H. Sloat, for respondent.



                                 OPINION

       GERBER, Judge:    Pursuant to Rule 121,1 this matter is before

the Court on petitioner’s motion for partial summary judgment.

The parties seek to determine, as a matter of law, whether

section 1.460-6(c)(2)(vi)(A) and (B), Income Tax Regs., is

invalid to the extent it contains no requirement that disputed

long-term contract claims meet the “all events test” to be

includable in the estimated contract price within the context of

section 460.

       Summary judgment may be granted if the pleadings and other

materials demonstrate that no genuine issue exists as to any

material fact and that a decision may be entered as a matter of

law.       See Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C.

518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).      There is no

genuine issue as to any material fact with respect to the



       1
        Unless otherwise indicated, all Rule references are to
the Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
taxable years at issue.
                                - 3 -

specific legal issue before us, and, accordingly, this matter is

ripe for judgment on the contested issue as a matter of law.      See

Rule 121(b).

                             Background

     Petitioner was organized pursuant to the laws of the State

of California on June 15, 1981.    At the time its petition was

filed, petitioner’s principal place of business was in Sylmar,

California.

     Petitioner is a general contractor in the construction

industry for public works projects, including highways and

government-owned buildings, and large-scale private developments,

such as office towers.    Petitioner enters into contracts either

on a fixed price basis or on a cost-plus basis.    All of the

contracts in issue in this case are fixed price contracts.      In a

fixed price contract, contractors formulate their bids on the

basis of the information contained in the architectural and

engineering drawings, designs, and geological reports provided by

the contracting agency.   Due to changes in drawings or designs,

customer-caused delays, errors in the specifications of the

drawings, designs, or reports, or other unanticipated delays,

additional work by the contractor is commonly required to

complete the job satisfactorily.

     The contracts in question obligate petitioner to complete

the job, and if it failed to do so, petitioner would be liable to
                               - 4 -

the government agency that is a party thereto (contracting party)

for damages.   Each of the contracts provided for liquidated

damages in the event petitioner failed to complete the job or did

not otherwise fulfill its contractual obligations.    The contracts

also provided for a retention of a specified percentage of the

contract price until the contracting party completed review of

the job and accepted it as completed.    Petitioner submitted

certain change orders on the contracts in question that were

denied by the other contracting party.    Petitioner followed the

required procedures for submitting claims and for appealing

adverse determinations on disputed claims.

     For Federal income tax purposes, petitioner was subject to

section 460 for the reporting of income from long-term contracts.

While petitioner reported income from its long-term contracts

under the percentage of completion method, it employed the all-

events test to govern income recognition from disputed claims.

Thus, petitioner did not include income from disputed claims when

estimating the total contract price under the percentage of

completion method, but petitioner instead reported as income only

the portion of disputed claims actually awarded to petitioner in

the taxable year in which either a settlement was entered into,

an arbitration award was determined, or a court rendered

judgment.
                                 - 5 -

     Respondent contends that the income from the disputed claims

should be included in the total contract price as required by

section 1.460-6(c)(2)(vi), Income Tax Regs.    Petitioner contends

that disputed claims should, as a matter of law, be reported in

accord with the all events test and included in income in the

taxable year in which income from the disputed claim is

ultimately awarded.    Petitioner contends that, to the extent the

all events test has not been employed, section 1.460-6(c)(2)(vi),

Income Tax Regs., is invalid.

                             Discussion

     Section 460 contains special rules for long-term contracts

and generally requires the use of the percentage of completion

method for tax reporting.    To the extent that a taxpayer

underestimates the percentage completed or the amount includable

in income, section 460(b) provides for “look-back” interest to be

paid by the taxpayer.2


     2
         Sec. 460(b) provides:

     (2) Look-back method.--The interest computed under the
     look-back method of this paragraph shall be determined
     by--

          (A) first allocating income under the
     contract among taxable years before the year in
     which the contract is completed on the basis of
     the actual contract price and costs instead of the
     estimated contract price and costs,

          (B) second, determining (solely for purposes
     of computing such interest) the overpayment or
                                                    (continued...)
                               - 6 -

     Section 460 was enacted by the Tax Reform Act of 1986, Pub.

L. 99-514, sec. 804(a), 100 Stat. 2385.   Prior to 1986, income

from long-term contracts could be accounted for under one of two

alternative methods:   the percentage of completion method or the

completed contract method.   Under the percentage of completion

method, income was recognized according to the percentage of the

contract completed during each taxable year.   The determination

of the portion of the contract completed during the taxable year

could be made either by (1) comparing the costs incurred during

the year to the total estimated costs to be incurred under the

contract, or (2) comparing the work performed during the year

with the estimated total work to be performed.   See sec. 1.451-

3(c)(2)(i) and (ii), Income Tax Regs.



     2
      (...continued)
     underpayment of tax for each taxable year referred
     to in subparagraph (A) which would result solely
     from the application of subparagraph (A), and

          (C) then using the overpayment rate
     established by section 6621, compounded daily, on
     the overpayment or underpayment determined under
     subparagraph (B).

     For purposes of the preceding sentence, any amount
     properly taken into account after completion of
     the contract shall be taken into account by
     discounting (using the Federal mid-term rate
     determined under section 1274(d) as of the time is
     so properly taken into account) such amount to its
     value as of the completion of the contract. The
     taxpayer may elect with respect to any contract to
     have the preceding sentence not apply to such
     contract.
                                - 7 -

     Under the completed contract method, the entire gross

contract price was included in income in the taxable year in

which the contract was finally completed and accepted.     All costs

properly allocated to a long-term contract were deducted in the

year of completion.    See sec. 1.451-3(d), Income Tax Regs.

Regulations under the completed contract method provided that any

disputed item of income which was properly allocable to a long-

term contract and which was not included in gross income in a

prior taxable year should be included in gross income in the

taxable year in which any such dispute is resolved.    See sec.

1.451-3(d)(3), Income Tax Regs.

     Section 460, enacted in 1986, as applicable to long-term

contracts entered into after February 28, 1986, required

taxpayers to compute income under either the “percentage of

completion capitalized cost method” or the percentage of

completion method.    Under the percentage of completion

capitalized cost method, taxpayers were required to report 40

percent of the contract items under the percentage of completion

method of accounting and were permitted to report the remaining

60 percent of the contract items under their normal method of

accounting.   The proportion of contract items required to be

reported under the percentage of completion method was

subsequently increased several times.    Ultimately, by the

enactment of the Omnibus Budget Reconciliation Act of 1989, Pub.
                               - 8 -

L. 101-239, 103 Stat. 2106, 100 percent of contract items for

long-term contracts entered into on or after July 11, 1989, had

to be reported under the percentage of completion method.

     Under the percentage of completion method of accounting,

income from the contract must be reported over the life of the

contract, and expenses must be deducted in the year incurred.

The reportable income for each year is calculated as follows:

the total contract costs incurred through the end of the tax year

are divided by the total estimated contract costs, and then

multiplied by the total contract price; the product of this

multiplication is reduced by gross income from the contract

reported for prior years.   See sec. 460; Cameron v. Commissioner,

105 T.C. 380 (1995), affd. sub nom. Broadway v. Commissioner, 111

F.3d 593 (6th Cir. 1997).

     Under section 460(b), a taxpayer is required to apply the

“look-back method” upon a contract’s completion (and possibly

again after a postcompletion event) to compensate the prejudiced

party (taxpayer or Government) for a taxpayer’s overestimation or

underestimation in applying the percentage of the completion

method.   Under this method, the taxpayer recomputes its income

tax (theoretically--since, in reality, taxpayers do not amend any

tax returns) for each year of the contract using the actual

contract price and costs instead of estimates.   Based on this

reconciliation, the taxpayer pays interest to the Government on
                                 - 9 -

any hypothetical underpayments of tax and receives interest from

the Government on any hypothetical overpayments of tax.

     If an amount of revenue or cost attributable to a completed

long-term contract is properly taken into account in a

postcompletion year, section 460(b)(1)(B) requires a taxpayer to

reapply the look-back method in that postcompletion year unless

the taxpayer elects otherwise.    For this purpose, section

460(b)(2) requires a taxpayer to discount the amount of revenue

or cost to its present value as of the contract’s completion date

and to redetermine the contract’s “actual contract price”.

     Promulgated in October 1990, section 1.460-6(c)(2)(vi),

Income Tax Regs., 55 Fed. Reg. 41665-01 (Oct. 15, 1990),

provides:

          (vi) Amount treated as contract price--(A) General
     rule. The amount that is treated as total contract
     price for purposes of applying the percentage of
     completion method and reapplying the percentage of
     completion method under the look-back method under Step
     One includes all amounts that the taxpayer expects to
     receive from the customer. Thus, amounts are treated
     as part of the contract price as soon as it is
     reasonably estimated that they will be received, even
     if the all-events test has not yet been met.

          (B) Contingencies. Any amounts related to
     contingent rights or obligations, such as incentive
     fees or amounts in dispute, are not separated from the
     contract and accounted for under a non-long-term
     contract method of accounting, notwithstanding any
     provision in § 1.451-3(b)(2)(ii), (iii), (iv), and §
     1.451-3(d)(2), (3), and (4), to the contrary. Instead,
     those amounts are treated as part of the total contract
     price in applying the percentage of completion method
     and the look-back method. For example, if an incentive
     fee under a contract to manufacture a satellite is
                             - 10 -

     payable to the taxpayer after a specified period of
     successful performance, the incentive fee is includible
     in the total contract price at the time and to the
     extent that it can reasonably be predicted that the
     performance objectives will be met, for purposes of
     both the percentage of completion method and the look-
     back method. Similarly, a portion of the contract
     price that is in dispute is included in the total
     contract price at the time and to the extent that the
     taxpayer can reasonably expect the dispute will be
     resolved in the taxpayer’s favor (without regard to
     when the taxpayer receives payment for the amount in
     dispute or when the dispute is finally resolved).

Sec. 1.460-6(c)(2)(vi)(A) and (B), Income Tax Regs.   Thus, under

the regulation, the total contract price used in the percentage

of completion calculation includes any amounts attributable to

contingent rights or obligations.

     Petitioner argues that (i) the regulation does not implement

the congressional mandate as required under applicable law; (ii)

the regulation attempts to “repeal”, without clear and explicit

congressional support, the all events test, which has been

recognized as a fundamental tax principle; (iii) respondent

attempts to usurp Congress and supersede the look-back method by

issuance of the regulation to address timing differences; and

(iv) the regulation is not reasonable in view of prior law and

usage and is not reasonable in application.3   Respondent argues

that it is reasonable to require a taxpayer to estimate the total

contract price of a long-term contract and, thus, to include a



     3
       Petitioner is not arguing that income arising out of
contingencies and disputes be excluded from the look-back method.
                               - 11 -

disputed claim related to that contract as soon as it is

reasonably estimated that income from the claim will be received.

Respondent maintains that the regulation’s inclusion of disputed

claims in the percentage of completion method satisfies

congressional intent and is therefore valid.

Validity of Sec. 1.460-6(c)(2)(vi), Income Tax Regs.

A.   Standard of Review

      Regulations are either legislative or interpretive in

character.    See Estate of Pullin v. Commissioner, 84 T.C. 789,

795 (1985).   An interpretive regulation is issued under the

general authority vested in the Secretary by section 7805,

whereas a legislative regulation is issued pursuant to a specific

congressional delegation to the Secretary.   Section 1.460-

6(c)(2)(vi), Income Tax Regs., appears to be issued under the

regulatory authority of section 460(h).   Respondent, however,

conceded that this regulation is interpretive.   Accordingly, we

need not determine whether this regulation is legislative or

interpretive in nature.   We note, however, that our holding would

be the same regardless of whether we use the standard employed

for legislative or interpretive regulations.

      An interpretive regulation, while entitled to deference, is

not entitled to as much deference as is accorded a legislative

regulation.   See United States v. Vogel Fertilizer Co., 455 U.S.

16, 24 (1982).   Moreover, the standard of deference accorded to
                               - 12 -

an interpretive regulation sets only “the framework for judicial

analysis; it does not displace it.”      United States v. Cartwright,

411 U.S. 546, 550 (1973).   Under the traditional standard of

review, interpretive regulations are to be found valid if they

“‘implement the congressional mandate in some reasonable

manner’”.    National Muffler Dealers Association, Inc. v. United

States, 440 U.S. 472, 476 (1979) (quoting United States v.

Correll, 389 U.S. 299, 307 (1967)).

     A regulation may not contradict the unambiguous language of

a statute.    See Citizen’s Natl. Bank v. United States, 417 F.2d

675 (5th Cir. 1969); Hefti v. Commissioner, 97 T.C. 180, 189

(1991), affd. 983 F.2d 868 (8th Cir. 1993).      Unless an

interpretive regulation is unreasonable and plainly inconsistent

with the statute, it should be sustained.     See Bingler v.

Johnson, 394 U.S. 741, 750 (1969).      However, even if a regulation

does not directly contradict the language of the statute it

purports to interpret, the regulation may still be invalid if it

is fundamentally at odds with or inconsistent with the statute’s

origin and purpose.4   See United States v. Vogel Fertilizer Co.,


     4
       We are mindful that the choice among reasonable statutory
interpretations is for the executive branch of Government and not
the courts. See National Muffler Dealers Association, Inc. v.
United States, 440 U.S. 472, 488 (1979). The issue is whether
the Secretary’s interpretation of the statute is a reasonable
one, not whether it is the best or only one. See Brown v. United
States, 890 F.2d 1329, 1338 (5th Cir. 1989). When the regulation
implements in some reasonable manner the congressional intent
                                                   (continued...)
                                - 13 -

supra at 26; CWT Farms, Inc. v. Commissioner, 79 T.C. 1054, 1062

(1982), affd. 755 F.2d 790 (11th Cir. 1985).

B.   Analysis

      Under the test articulated in Chevron U.S.A., Inc. v.

Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), the first

question we must ask when reviewing an agency’s interpretation of

a statute is whether Congress has addressed the precise question

under consideration and has expressed its intent as to its

resolution.     The examination should begin with the language of

the statute.    See Consumer Prod. Safety Commn. v. GTE Sylvania,

Inc., 447 U.S. 102, 108 (1980); Abourezk v. Reagan, 785 F.2d

1043, 1053 (D.C. Cir. 1986).

      In deciding whether the regulation comports with the

statute’s plain language, we look to the ordinary usage or

settled meanings of the words used in the statute by Congress.

See Lynch v. Alworth-Stephens Co., 267 U.S. 364, 370 (1925).

There is a strong presumption that Congress expresses its

intention through the language it chooses.     See INS v. Cardoza-

Fonseca, 480 U.S. 421, 432 n.12 (1987).     Section 460 contains the




      4
      (...continued)
underlying a provision, courts are not at liberty to strike down
the regulation merely because the taxpayer offers a more
attractive statutory interpretation. See id.
                               - 14 -

phrase “estimated contract price”.5     This language indicates that

Congress was aware of the fact that taxpayers were being required

to estimate when using the percentage of completion method in

accounting for long-term contracts.     The fact that section

460(b)(2)(A) requires a taxpayer to substitute “actual contract

price and costs” for “estimated contract price and costs” when

applying the look-back method at the contract’s completion

underscores the fact that the total contract price used in the

percentage of completion method calculation is an estimate of the

total contract price and is likely to change during the

performance of the contract.   This conceptual underpinning is the

antithesis of the all events test.6

     The term “estimated” does not necessarily include, as

respondent contends, revenues from disputed claims.     The term

“estimate,” however, does not preclude the possibility that

Congress intended that disputed claims be included.     In any



     5
       The parties do not dispute the definition of the term
“estimated”. According to the dictionary, “estimate” means to
judge tentatively or approximately the value, worth or
significance of; to determine roughly the size, extent, or nature
of; or to produce a statement of the approximate cost of. See
Merriam-Webster’s Tenth Collegiate Dictionary 397 (1997).
     6
       Furthermore, in a number of tax accounting cases, the
Supreme Court has decided that estimates of anticipated expenses
are not accruable as deductions under the all events test. See
United States v. General Dynamics Corp., 481 U.S. 239, 243-244
(1987). The repeated use of the word “estimated” indicates that
standard principles of accrual accounting, including the all
events test, are not determinative.
                             - 15 -

event, there is nothing in the regulation that contradicts the

plain language of the statute.

     As stated above, even if a regulation does not clearly

contradict the language of the statute it purports to interpret,

the regulation may still be invalid if it is fundamentally at

odds with or inconsistent with the statute’s origin and purpose.

See United States v. Vogel Fertilizer Co., supra at 26; CWT

Farms, Inc. v. Commissioner, supra at 1062.    Because the use of

the word “estimated”, alone, does not reveal the congressional

intent, we must determine whether the regulation harmonizes with

and implements the congressional mandate in some reasonable

manner.

     There is no doubt about Congress’ concern that the completed

contract method of accounting for long-term contracts permitted

an unwarranted deferral of the income from those contracts.    See

S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3) 140; Staff of the

Joint Comm. on Taxation, General Explanation of the Tax Reform

Act of 1986, at 527 (J. Comm. Print 1987).    Congress sought to

limit the tax deferral obtainable through use of the completed

contract method by requiring taxpayers to report income from

long-term contracts on a percentage of completion method.     It was

recognized that use of the percentage of completion method could

produce harsh results for taxpayers where an overall loss was

experienced or where actual profits were significantly less than
                                - 16 -

projected.   Thus, Congress provided for a “look-back” to account

for variances between the estimated and the actual figures.

     Although there is no specific support in the legislative

history for respondent’s position, use of the terms “expected”

and “anticipated” lends support to respondent’s position and is

helpful to our consideration.    The House report described the

intended operation of the percentage of completion method as

follows:

        Income from all long-term contracts must be reported
     under the percentage of completion method based on the
     expected costs rather than physical completion. Thus,
     the amount of gross income from a long-term contract
     recognized in a particular taxable year generally is
     that proportion of the expected contract price that the
     amount of costs incurred through the end of the taxable
     year bears to the total expected costs, reduced by
     amounts of gross contract price that were included in
     gross income in previous taxable years. [H. Rept. 99-
     426 (1986), 1986-3 C.B. (Vol. 2) 630; emphasis added.]

     In describing the operation of the look-back method, the

Staff of the Joint Committee on Taxation added:

        In the taxable year in which the contract is
     completed, a determination is made whether the taxes
     paid with respect to the contract in each year of the
     contract were more or less than the amount that would
     have been paid if the actual gross contract price and
     the actual total contract costs, rather than the
     anticipated contract price and costs, had been used to
     compute gross income. [Staff of Joint Comm. on
     Taxation, General Explanation of the Tax Reform Act of
     1986, at 528 (J. Comm. Print 1987); emphasis added.]
     * * *
                              - 17 -

     While it is clear that Congress intended the total contract

price to be computed by means of an estimate, the legislative

history contains no reference to disputed or contingent items.

Furthermore, there is no explicit indication as to whether the

all events test applies.   There is a reference to contingent

items in the General Explanation of the Tax Reform Act of 1986,

which contains the statement that “For purposes of the ‘look-

back’ method, the contract price shall reflect all amounts

received under the contract, including amounts received after the

contract completion date as a result of disputes, litigation or

settlements relating to the contract.”7   Id.

     Because disputed claims are includable in the look-back

computation, an earlier inclusion of disputed claims will result

in smaller underpayments and interest.    Thus, requiring taxpayers

to treat disputed claims as part of the contract price as soon as

it is reasonably estimated that they will be received harmonizes

with the statute’s overall purpose, as reflected by its



     7
       While the General Explanation of the Tax Reform Act of
1986 does not rise to the level of legislative history because it
is prepared by congressional staff after enactment of the
statute, it has been considered highly indicative of what
Congress did, in fact, intend and we take it into consideration.
See Staff of Joint Comm. on Taxation, General Explanation of the
Tas Reform Act of 1986 (J. Comm. Print 1987); Estate of Wallace
v. Commissioner, 965 F.2d 1038, 1050-1051 n.15 (11th Cir. 1992);
FPC v. Memphis Light, Gas & Water Div., 411 U.S. 458, 472 (1973)
(indicating that the General Explanation of the Tax Reform Act is
a probative contemporary indication of the effect of a statutory
provision).
                              - 18 -

legislative history.   Based on indications in the legislative

history that Congress was concerned with taxpayer deferral of

income, a regulation requiring all revenues to be reasonably

estimated and included in the total contract price comports with

that congressional intent.8

     Petitioner makes several contrary arguments.   First, it

contends that implicit in the enactment of the look-back method

is congressional approval of the all events test.   The all events

test, which was developed as case law and embodied in

regulations, applies to accrual method taxpayers and is used in

determining the taxable year in which items of income or

deductions are properly reported by such taxpayers.   Under

section 1.451-1(a), Income Tax Regs., income is includable in

gross income when all the events have occurred which fix the

right to receive such income and the amount thereof can be

determined with reasonable accuracy.   Under the all events test,

disputed claims to income are not accruable until a settlement is



     8
       We also note that the regulation has been in existence
without relevant change since its promulgation in 1990, and
during its existence Congress has amended section 460 without
amending section 460(b) to alter the regulation’s interpretation
of the statute. Under the successive reenactment doctrine, if
Congress reenacts without change the statutory language that has
been construed by the agency administering that statute,
Congress’ decision not to change that statutory language may be
persuasive evidence that the agency’s construction is the one
intended by Congress. See Commodity Futures Trading Commn. v.
Schor, 478 U.S. 833, 845-846 (1986).
                              - 19 -

entered into or a judgment is rendered and all appeals are

exhausted.   See United States v. Safety Car Heating & Lighting

Co., 297 U.S. 88 (1936).   Petitioner contends that a fundamental

tax principle cannot be “repealed”9 by respondent without

explicit congressional authorization, and no such authorization

is present in this case.

     It is true that Congress did not explicitly state that the

all events test should not apply with respect to contingent items

for purposes of long-term contracts.   However, because the

section 460 version of the percentage of completion method is a

self-contained, statutorily created form of accounting method

which varies substantially from prior accrual accounting

methodology, we do not believe that an explicit statement from

Congress regarding the all events test is necessary to validate

the regulation.   The section 460 approach to the percentage of

completion method is the method of accounting that Congress chose

for the reporting of long-term contract income in order to modify

the deferral of income previously permitted.   While section

1.451-3(d)(3), Income Tax Regs., incorporated aspects of the all

events test under the completed contract method, Congress is free

to change the method of accounting with respect to long-term


     9
       Petitioner’s use of the term “repealed”   is a misnomer
because the all events test was developed as a   principle of case
law and embodied in regulations. Congress has    implicitly
approved of this principle by not subsequently   legislating
otherwise.
                              - 20 -

contracts without retaining the all events test or explicitly

stating that the all events test is not to be utilized.

     Petitioner also contends that the section 460(b)(1)(B)

parenthetical language “with respect to any amount properly taken

into account after completion of the contract, when such amount

is properly taken into account” indicates an intent to include

the all events test as part of the percentage of completion

method.   While this language does contemplate the resolution of

some items after the year the contract is completed, there is no

indication that Congress intended this language to incorporate

the all events test in the percentage of completion method of

section 460.   The phrase “amount properly taken into account

after completion of the contract” could include amounts properly

taken into account for reasons unrelated to the all events test.

For example, it is possible for a long-term contract to be

complete for tax purposes even though the taxpayer reasonably

expects to incur additional unforeseeable costs in a post-

completion tax year.   It is also possible that contingent items,

such as disputed claims, cannot be reasonably estimated before

the completion of the contract, in which case revenue from those

disputed claims would not be taken into account until after the

completion of the contract.   Moreover, the parenthetical language

indicates an intent to use the all events test for purposes of

adjusting the “actual” contract price.   Cf. sec. 460(b)(2); sec.
                              - 21 -

1.460-6(c)(1)(ii)(A), Income Tax Regs.   However, the “actual”

contract price is to be contrasted with the “estimated” contract

price, the latter of which is not governed by the all events

test.   Thus, we decline to read the parenthetical language as

evidence of congressional intent to apply the all events test to

taxpayers’ disputed claims for purposes of computing the

estimated contract price.

     Furthermore, the language relied on by petitioner is

employed in the context of how the look-back method operates.

Taxpayers are required to apply the look-back method to any

amounts that are taken into account after completion of the

contract.   Thus, if income is received and properly accounted for

5 or 10 years after completion of the contract, those revenues

are discounted back to the year of completion, and the look-back

method is applied.   Such application would likely result in

underpayment interest due by the taxpayer if post-completion

revenues were not included in the estimated total contract price

at the time it was reasonably expected that they would be

received by the taxpayer.

     In addition, requiring the inclusion of an estimate of

disputed claims in the total contract price as soon as the

taxpayer reasonably expects to receive them will reduce the

likelihood that a taxpayer will have to pay look-back interest.

The purpose of the look-back method is to offset the time-value
                              - 22 -

effects of using estimates during the life of a contract that may

differ from the actual amounts determined upon completion.

Because the all events test does not recognize income until it is

fixed and determinable, requiring use of the all events test

would render moot any “estimating” of the total contract price,

lead to additional timing differences (income deferrals) and

likely require taxpayers to pay more look-back interest.

Moreover, the statute by its plain language calls for the use of

“estimated” contract price and costs.

     Petitioner relies on Professional Equities, Inc. v.

Commissioner, 89 T.C. 165 (1987), contending that we should

declare the “contingent items” regulation invalid to the extent

it purports to regulate the contents of a long-term contract’s

total contract price.   We do not view Professional Equities, Inc.

as support for invalidation of the subject regulation.   The

temporary regulation considered in Professional Equities, Inc.

was designed to overturn a long line of precedent beginning with

the holding in Stonecrest Corp. v. Commissioner, 24 T.C. 659

(1955).   In Stonecrest Corp., we held that the “assumed” and

“subject to” rules in the regulations interpreting former section

453(c) did not apply to wraparound mortgages.   The regulation at

issue in Professional Equities, Inc. was at variance with the

Stonecrest Corp. line of cases as well as being at odds with the

language of the statute.   In Professional Equities, Inc. v.
                                - 23 -

Commissioner, supra at 180, we invalidated the temporary

regulation and concluded that the Secretary did not have

discretion to “reach a result contrary to the basic objective of

the statute by requiring the recognition of additional gain

beyond what is proportionately reflected in the payments received

during the first year.”10   The regulation we consider here is a

reasonable interpretation of the statutory intent and in harmony

with the overall purpose of the legislative initiative.    Thus, we

do not view Professional Equities, Inc. as instructive with

regard to the validity of the subject regulations.

     Finally, petitioner argues that the subject regulations

should be declared invalid because of the alleged difficulty for

taxpayers to determine when they have a reasonable expectation of

recovery on a disputed claim.    We recognize that the regulation’s

“reasonable expectancy” standard may result in difficulties in

the determination of when a contingent item can be reasonably

expected to be received.    By promulgating such a regulation,

respondent may be called upon to determine when it is reasonably

foreseeable that a contingent item will be received by a

taxpayer.   This may not be an easy task, and in petitioner’s

case, there is no indication whether respondent will prevail in

such a controversy.   However, difficulty of this kind is not a



     10
       The Court also noted that the regulation was “tortuously
complex” and was not compatible with the goals of the statute.
                                - 24 -

reason to invalidate the regulation; the determination of when a

contingent item can be reasonably expected to be received can be

made on a case-by-case basis.    The regulation is a reasonable

interpretation of, and plainly consistent with, the underlying

statute.11

     In light of the foregoing, we hold that section 1.460-

6(c)(2)(vi), Income Tax Regs., is valid because it harmonizes

with the plain language, origin, and purpose of section 460.

     We have considered the parties’ remaining arguments and find

them either irrelevant or unnecessary for resolving the parties’

controversy.   To reflect the foregoing,

                                     An order will be issued

                                denying petitioner’s motion for

                                partial summary judgment.




     11
       Although petitioner’s position may also be a reasonable
interpretation, we are constrained to uphold the regulation if it
has a reasonable basis in the statutory history, even though
petitioner’s challenge may have some logical force. See Pagel,
Inc. v. Commissioner, 91 T.C. 200, 218 (1988), affd. 905 F.2d
1190 (8th Cir. 1990).
