Section 461: a code section whose time has gone - d

Tax Executive, The, Jan-Feb, 1994 by Larry J. Lisses, Russell C. Nissen

With respect to the CFT, the all-events test is certainly satisfied by the end of the year for which the tax is to be paid. As Rev. Rul. 79-410 recognized, but for section 461(d), the CFT (as currently structured) as determined on the income of year 1 is accruable and deductible in year 1 (the income year). In other words, if the deductibility of the CFT in the income year were determined under section 461(h), the question would turn only on whether economic performance occurs in the income year. A review of the applicable regulations demonstrates that it likely does.

Treas. Reg. [section] 1.461-4 (which was promulgated on April 9, 1992) prescribes rules on when economic performance occur. Subsection (g) describes certain liabilities for which economic performance has not occurred until the liability is paid, with paragraph (6) specifically addressing taxes:

[I]f the liability of a taxpayer is to pay a tax, economic performance occurs as the tax is paid to the governmental authority that imposed the tax.. ..[P]ayments includes payment of estimated income tax and payments of tax where the taxpayer subsequently files a claim for credit or refund.... In certain cases, a liability to pay tax is permitted to be taken into account in the taxable year before the taxable year during which economic performance occurs under the recurring item exception of [section] 1.461-5.

Clearly, under section 461(h) and Treas. Reg. [section] 1.461-4, the CFT is deductible when paid.

The recurring item exception mentioned in Treas. Reg. [section] 1,461-4(g)(6) is set forth in section 461(h)(3) and provides, in pertinent part:

[A]n item shall be treated as incurred during any taxable year if--

(i) the all events test with respect to such item is met during such taxable year,

(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) 8 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.

Based on the foregoing analysis of the all-events test and economic performance regulations, a reasonable argument can be made that the CFT under current California law would qualify for current deductibility under the recurring item exception. There does not appear to be any question that the liability for CFT is fixed and determinable by the end of the income year. Section 461(h) requires that a tax must actually be paid in order for economic performance to occur. CFT is generally paid during the income year in the form of estimated tax payments. If CFT is deemed a recurring item--which seems reasonable--any payments of CFT made within 8 months after the end of the income year should also be deductible in the income year. Deduction of CFT in the income year certainly results in a more proper match against income than deducting it in the subsequent year as prescribed by section 461(d). In addition, CFT is generally deducted in the income year for financial statement purposes.