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the end of year 1. In Brown v. Helvering, taxpayer’s liability in year 1 was still un- — by purchasing additional products by
291 U.S. 193 (1934), the Supreme Court certain because it depended on distribu- the close of the announcement period
indicated that a taxpayer may not deduct tors’ sales events in year 2. In contrast, (date 1 of year 1).
a contingent liability. And in Hallmark in Hughes Properties, the existence of the Disagreeing, the IRS said the facts did
Cards, Inc., 90 T.C. 26 (1988), the Tax liability to pay the jackpot was certain — not indicate that participating distribu-
Court stated that the all-events test is the only contingency was the identity of tors had relied upon the offer to purchase
based on the existence or nonexistence of the jackpot winners. any additional products from the taxpayer
legal rights or obligations at the close of Similarly, the manufacturer’s situa- in year 1. Also, the Service noted that
a particular accounting period, not on the tion was distinguishable from that in since the taxpayer issued the announce-
probability — or even absolute certainty Willoughby Camera Stores, Inc., 125 F.2d ment letters only a few days prior to its
— that such right or obligation will arise 607 (2d Cir. 1942), the IRS concluded fiscal year end, the distributors would
at some point in the future. in the memorandum. In Willoughby, at have had little or no time or opportunity
Under the taxpayer’s facts, the guaran- the end of each year, the taxpayer’s board to act upon the taxpayer’s offer in year 1.
teed minimum payment was not required of directors determined an amount to In addition, the IRS said, the taxpayer
to be paid unless participating distribu- be paid as bonuses during the next year, was unable to confirm or track whether
tors sold the products in the following which was set up on the taxpayer’s books any participating distributors opened or
year (year 2) and earned sales incentives as a reserve. The taxpayer then was al- viewed the announcement letters, and the
less than the guaranteed minimum lowed a deduction for the tax year in taxpayer received no inquiries or commu-
amount. The IRS concluded that since which this determination was made. The nication from any distributors regarding
the last event necessary to establish the Second Circuit noted that the action of the announcement letters. Thus, the tax-
taxpayer’s liability occurred in year 2, the the taxpayer’s board of directors must be payer’s contractual argument in support
taxpayer could not establish the fact of its regarded as definitely fixing a minimum of accelerating the deduction failed, too.
liability in year 1. payment and that it was apparent that the
Relevant case law: In the memo- action was intended by the company and Final thoughts
randum, the IRS discussed two court accepted by the employees as more than a For accrual-method taxpayers, a liability
cases regarding the deduction of guar- statement that so much would be paid if is incurred in the tax year when the all-
anteed payments in analyzing whether the company did not change its mind. events test is met. Importantly, before a
the taxpayer’s liability could be deducted Unlike in Willoughby, the manufac- liability is considered as incurred, the “last
in the year when the guaranteed mini- turer’s distributors in the present case event” necessary to establish the existence
mum payment was promised. In Hughes would not expect to receive the guaran- of the taxpayer’s liability must have hap-
Properties, Inc., 476 U.S. 593 (1986), the teed minimum payment until they sold pened, and the liability cannot be contin-
Supreme Court allowed a Nevada casino the manufacturer’s products in year 2. gent. Based on the Hughes Properties and
operator to deduct amounts guaranteed And, even then, the guarantee would arise Willoughby cases, it can be assumed that a
for payment of progressive slot machine only if certain requirements were met. set-aside reserve account for future pay-
jackpots that had not yet been won by Thus, the situations are not parallel, the ments can be helpful in demonstrating
casino patrons. The Court found that the IRS concluded. that a liability has been incurred. And if
last event necessary to establish the liabil- The taxpayer’s contract law the unilateral-contract doctrine is appli-
ity was the last play of the slot machine at argument: To justify accelerating its cable in a taxpayer’s state and relied on by
year end because, even if the jackpot was deduction to year 1, the manufacturer the taxpayer, the taxpayer should retain
not won with that play, Nevada law had also argued that its commitment to make any evidence of the offeree’s reliance on
the effect of irrevocably setting aside the the guaranteed minimum payment was the offer and actual partial performance
amount of the jackpot by that last play, enforceable under state law as a unilateral in case the IRS audits the transaction.
which the casino was required to pay to contract, pointing to legal principles that From Zhonglu Yang, CPA, MBT, Los
the eventual winner. the commencement of partial perfor- Angeles ■
But the IRS found that the manufac- mance by an offeree can render an offer
turer’s facts were distinguishable. One of irrevocable. Specifically, the taxpayer Editor
the two last events necessary to establish argued that it extended an offer when it
the liability for the minimum payments promised in the announcement letters to Mark G. Cook, CPA, CGMA, MBA, is the
was when distributors sold the products make the guaranteed minimum payment lead tax partner with SingerLewak LLP in
during the qualifying period in year and that the distributors partially per- Irvine, Calif.
2. In other words, the existence of the formed — making the offer irrevocable

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