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make clear that the FTB is broadening
its view of what constitutes business The company’s mere promise to pay was not
income for individual nonresidents, the
gain from which must be sourced at sufficient to consider the liability fixed since
least in part to California. all of the events to establish the fact of the
From Yukari Takahashi, CPA,
Los Angeles liability did not occur during the year the offer
was made.

Tax Accounting
Sec. 461(a) states that deductions not earn enough sales incentives during
All-events test for sales and credits must be taken in the proper the specified period to equal at least the
incentives — one perspective tax year, according to the taxpayer’s amount of the guaranteed minimum
The IRS, through Technical Advice method of accounting used to de- payment. Given both of these facts, the
Memorandum (TAM) 202121010, has termine taxable income. Under the IRS concluded that the first prong of
clarified when the all-events test of accrual method, taxpayers can deduct the all-events test was not met.
Sec. 461 is met for an accrual-method an expense if the liability meets the all- To pass the second prong of the all-
taxpayer that promised to pay sales events test as described in Sec. 461(h) events test, the amount of the liability has
incentives to third-party distributors. and Regs. Sec. 1.461-1(a)(2)(i). The to be determined with reasonable accu-
The IRS concluded that the liability all-events test is met when (1) all the racy. It is not necessary to know the exact
generated from the sales incentives is events have occurred that establish the amount, so long as the liability has been
incurred under the all-events test in the fact of the liability; (2) the amount of incurred and the amount is determined
tax year the incentives are earned, not the liability can be determined with with reasonable accuracy. A liability is
in the tax year of the taxpayer’s promise reasonable accuracy; and (3) economic not deductible if it is contingent or based
to pay. performance has occurred with respect upon an estimate if the events in question
To incentivize a third-party distribu- to the liability. Sec. 461(h)(1) states that have not occurred by the end of the tax
tor to make additional purchases of the all-events test shall not be treated year, no matter how statistically certain
the taxpayer’s product before year end, as met any earlier than when economic (General Dynamics Corp., 481 U.S. 239
the manufacturing and distribution performance with respect to that item (1987)). Here, the taxpayer’s guaranteed
company made an offer guaranteeing a occurs. Applying the all-events test to minimum payment is not payable unless
minimum sales incentive payment for the facts and circumstances of the tax- the distributor makes sales of the inven-
sales of products in the distributor’s in- payer’s sales incentive offer clarifies the tory in year 2. Given that the event neces-
ventory at the end of year 1, which were IRS’s decision. sary to determine the liability did not
sold during a specified period in the Generally, all events have occurred occur during year 1, the IRS concluded
subsequent year 2. The minimum pay- to establish the fact of a liability when that the second prong of the all-events
ment applied only if the distributor did (1) the event fixing the liability oc- test also was not met.
not earn sales incentives in the specified curs, whether that is the required Additional sections of the TAM
period equaling at least the amount of performance or other event, or (2) the provide guidance about the economic
the guaranteed minimum. The offer payment is unconditionally due. The performance requirement for the liability
was made in writing a few days before taxpayer’s sales incentive offer here in question. A sales incentive is in effect a
the end of the taxpayer’s fiscal year was contingent upon the distributor’s rebate. Regs. Sec. 1.461-4(g)(3) provides
to encourage additional purchases of selling at least one unit of product that economic performance as it relates
products. The taxpayer’s position was from its ending inventory of year 1 in to liabilities of rebates, refunds, or other
that its promise in writing to pay a the subsequent year 2. Given that the payments occurs as payment is made to
guaranteed minimum of sales incentives sales could not occur until year 2 to be the person to which the liability is owed.
to distributors in the following year met eligible for the incentive, the event(s) However, a recurring-item exception to
the all-events test, allowing the taxpayer fixing the liability did not occur during this general rule of economic performance
to deduct the guaranteed minimum as year 1. Additionally, the sales incentive described in Regs. Sec. 1.461-5(b)(1)
a reduction of gross receipts in the tax offer stated that the taxpayer was not applies if:
year the offer was made, not the year the obligated to make the guaranteed mini- 1. At the end of the tax year, all events
incentive was paid. mum payment unless the distributor did have occurred that establish the fact

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