June 15, 2018 The Tax Lawyer

The Fact of the Liability Requirement in the All Events Test—Flying Lessons over the Dark Clouds of General Dynamics from a Giant Eagle

Vol. 71, No. 3 - Spring 2018

Philip G. Cohen

     For taxpayers employing the accrual method of accounting, a liability is generally deductible 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.” The first requirement of the all events test, establishing the fact of the liability, was the subject of a thought-provoking Third Circuit decision, Giant Eagle, Inc. v. Commissioner, a case in which the taxpayer prevailed. In Giant Eagle, the dissenting judge, Thomas M. Hardiman, determined that the majority’s reasoning contained a fatal flaw: it did not adequately address the fact that the rebate program established by the taxpayer included an expiration provision on claims not filed within a prescribed time frame. This Article utilizes Giant Eagle to analyze conditions precedent that are real versus those that are mere technicalities, the differences between conditions precedent and conditions subsequent, and the effect of waivers upon establishing the fact of the liability. Other important lessons are garnered from the examination of Giant Eagle, including overcoming the questionable decision of the Supreme Court in United States v. General Dynamics Corp.

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