Veco Corp. v. Comm'r

• Decision Date: 20 November 2013
• Docket Number: No. 24918–10.,24918–10.
• Citation: 141 T.C. 440,141 T.C. No. 14
• Parties: VECO CORPORATION and Subsidiaries, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

?141 T.C. No. 14
141 T.C. 440

VECO CORPORATION and Subsidiaries, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 24918–10.

United States Tax Court.

Nov. 20, 2013

Decision for IRS.

On its Federal income tax return for the taxable year ending Mar. 31, 2005 (TYE 2005), P, an accrual method taxpayer, implemented a proposed change in accounting method and in so doing accelerated deductions for parts of certain liabilities attributable to periods after the close of P's TYE 2005. R rejected P's proposed change in accounting method and denied P's claimed accelerated deductions. P claims that it was entitled to accelerate the deductions under the “all events” test of I.R.C. sec. 461 and/or the recurring item exception to the economic performance rules of I.R.C. sec. 461(h)(3). For financial statement purposes petitioner accrued the liabilities over more than one taxable year. P treated the liabilities inconsistently for financial statement and tax purposes.

Held: Because neither the required performances nor the payment due dates with respect to the majority of the accelerated deductions occurred before the close of P's TYE 2005, P failed to satisfy the first requirement of the all events test of I.R.C. sec. 461; i.e., P failed to prove that all of the events had occurred to establish the fact of the liabilities under sec. 1.461–1(a)(2)(i), Income Tax Regs.

Held, further, with respect to the remaining accelerated deductions, P did not satisfy all of the requirements for the recurring item exception under I.R.C. sec. 461(h)(3) and, consequently, is not excepted from the general rule of I.R.C. sec. 461(h)(1) requiring economic performance, because the liabilities underlying the deductions were prorated over more than one taxable year, were treated inconsistently for financial statement and tax purposes, and were material items for tax purposes within the meaning of I.R.C. sec. 461(h)(3)(A)(iv)(I). See sec. 1.461–5(b)(4), Income Tax Regs.

Christina M. Passard, for petitioner.

Davis G. Yee and Keith G. Medleau, for respondent.

OPINION
MARVEL, Judge:

[141 T.C. 441]

On its Federal income tax return for the taxable year ending (TYE) March 31, 2005, VECO Corp. & Subsidiaries (collectively, petitioner or affiliated group), which used the accrual method of accounting, implemented a proposed change in accounting method that accelerated approximately $5,010,305 of deductions for parts of certain liabilities attributable to periods after the close of petitioner's TYE March 31, 2005. Petitioner contends it was entitled to accelerate its deductions for these expenses under the “all events” test of section 461 ¹ and/or the recurring item exception to the economic performance rules under section 461(h)(3). In a notice of deficiency dated August 17, 2010, respondent disallowed the portions of the deductions attributable to periods after March 31, 2005, and accordingly determined a $1,919,359 deficiency in the Federal income tax of petitioner for TYE March 31, 2005.

After concessions,² the issues for decision are: (1) whether, under the all events test of section 461, petitioner properly accelerated and deducted on its Federal income tax return for TYE March 31, 2005, certain expenses attributable to periods ending after TYE March 31, 2005; (2) alternatively, whether section 467 prevents petitioner from using the recurring item exception under section 461(h)(3) to accelerate deductions for expenses attributable to an equipment lease

[141 T.C. 442]

and certain real estate leases; ³ and (3) if petitioner properly claimed deductions for expenses under amendment XIV to the 949 East 36th Avenue lease and the 949 East 36th Avenue commercial sublease agreement for the period after March 31, 2005, whether, under section 1.1502–13(c), Income Tax Regs., petitioner must include in income the rent petitioner received under those leases for the same period. Because we conclude that petitioner did not properly deduct the accelerated expenses attributable to periods after March 31, 2005 on its Federal income tax return for TYE March 31, 2005, we do not reach issues (2) and (3).

Background

The parties submitted this case fully stipulated under Rule 122. We incorporate the stipulated facts, and facts drawn from stipulated exhibits, into our findings by this reference.

I. Background

VECO Corp. is a corporation organized and existing under Delaware law with its principal office in Alaska. VECO Corp. is the common parent of an affiliated group of corporations that includes VECO Equipment, Inc. (VECO Equipment), VECO Services, Inc. (VECO Services), VECO Alaska, Inc. (VECO Alaska),⁴ VECO USA, Inc. (VECO USA),⁵ VECO 36th Avenue, Inc. (VECO 36th Avenue), VECO Properties, Inc. (VECO Properties),⁶ Norcon, Inc., RTX, Inc., HEBL, Inc., and VECO Federal, Inc.

Petitioner is engaged in various business activities including oil and gas field services, newspaper publishing, manufacturing, construction, equipment rental, wholesale sales, leasing, and engineering. During years preceding and

[141 T.C. 443]

including the taxable year in issue petitioner entered into a number of service contracts, licensing contracts, insurance contracts, and real property and equipment leases, described infra.

Petitioner prepared consolidated financial statements in accordance with generally accepted accounting principles (GAAP) for fiscal years ending (FYE) March 31, 2005, 2006, and 2007. Petitioner maintained general ledgers and working trial balances for each member of the affiliated group for FYE March 31, 2005. For Federal income tax purposes, petitioner uses the accrual method of accounting and has a TYE March 31.

II. Petitioner's Tax Reporting

Petitioner filed a Form 1120, U.S. Corporation Income Tax Return, for TYE March 31, 2005, on which it reported total income of $71,497,738 and claimed total deductions of $64,608,986.⁷ Petitioner attached to its return a Form 3115, Application for Change in Accounting Method, for TYE March 31, 2005, requesting an accounting method change pursuant to Rev. Proc.2005–9, 2005–1 C.B. 303.⁸ Petitioner reported on an attachment to the Form 3115 that it presently deducted liabilities as follows: (1) with respect to liabilities for which economic performance was satisfied by payment, petitioner capitalized the liability and amortized the payment over the life of the agreement; (2) with respect to liabilities for which economic performance was not satisfied by payment, petitioner deducted the liabilities “in the period to which they relate.” Petitioner proposed a change in its accounting method to: (1) deduct liabilities in the year incurred under the all events test, with modifications under the recurring item exception for insurance and maintenance

[141 T.C. 444]

agreement payments; and (2) with respect to rent liabilities for which economic performance is not satisfied by payment, deduct the liabilities “in the year the liabilities are fixed and determinable with reasonable accuracy, and where economic performance has occurred”.

Petitioner implemented its proposed change in accounting method and prepared its Form 1120 for TYE March 31, 2005, accordingly. As a result of the change in accounting method, petitioner claimed deductions for prepaid expenses and accrued expenses attributable to periods after March 31, 2005, claiming that its tax treatment of the expenses was permitted under the all events test of section 461 and/or the recurring item exception under section 461(h)(3). Those accelerated deductions are at issue here.

A. Prepaid Expenditures 1. Aspen Technology Agreement

On March 31, 2003, VECO Corp. and Aspen Technology, Inc. (Aspen Technology) entered into a software license and service agreement for the period from March 31, 2003, through March 31, 2009 (Aspen agreement). Under the Aspen agreement Aspen Technology licensed use of its software and agreed to provide software maintenance services to VECO Corp. VECO Corp. agreed to pay license fees over six consecutive years as follows: (1) $161,000 on April 30, 2003; ⁹ (2) $206,000 on March 30, 2004; (3) $212,180 on March 30, 2005; (4) $218,545 on March 30, 2006; (5) $225,102 on March 30, 2007; and (6) $231,855 on March 30, 2008. VECO Corp. also agreed to pay an annual service fee of $11,945 ¹⁰ for the first effective year of the contract and an annual service fee of $38,000 for each subsequent year.

VECO Corp. made payments to Aspen Technology as follows: (1) $172,945 on June 6, 2003; (2) $39,140 on June 29, 2004; and (3) $40,314 on April 27, 2005. In February 2006 VECO Corp. received an invoice dated February 13, 2006,

[141 T.C. 445]

from Bank of America Leasing for $218,545 with respect to the Aspen agreement. VECO Corp. paid the invoice by check dated February 24, 2006, made payable to Bank of America Leasing.

Petitioner treated $200,235,¹¹ which was attributable to the period April 1 to August 1, 2005, as an FYE March 31, 2006, expense on its financial statements for that year. However, petitioner deducted the $200,235 on its return for TYE March 31, 2005.

2. Primavera Agreement

Primavera provided software management services for VECO Alaska pursuant to a service agreement between Primavera and VECO Alaska that is not in the record.

Primavera issued an invoice dated December 31, 2004, for $10,600 to VECO Alaska. VECO Alaska paid the invoice by check dated April 4, 2005.

Petitioner treated $7,950,¹² which was attributable to the period April 1 to December 1, 2005, as an FYE March 31, 2006, expense on its financial statements for that year. However, petitioner deducted the $7,950 on its return for TYE March 31, 2005.

3. Surveyor's Exchange Agreement

The record does not contain a copy of the service agreement between Surveyor's Exchange Co. (Surveyor's Exchange) and VECO Alaska.

Surveyor's Exchange issued an invoice dated March 17, 2005, for $51,895 for Autocad subscription renewals to VECO Alaska. VECO Alaska paid the invoice by check dated April 14,...