The All Events Test in an Era of Self-Regulation

Accrual-method taxpayers must use the all events tests to account for rights and liabilities under contracts for sales of goods and services. These longstanding tests evolved from transactions that involved relatively straightforward exchanges of goods or services for payments, and the tests currently reflect an expectation that a taxpayer will usually make an accrual when a seller’s performance fixes the contracting parties’ respective right to and liability for payment. Business practices have changed such that many sales now occur in relationships where contracting parties assume, monitor, and enforce process-related obligations, including adoptions of codes of conduct by members of global supply chains. This Article explains how these efforts to self-regulate transactions complicate applications of the all events tests because the expectations of performance and consequences of noncompliance for credence attributes of goods or services have uncertain effects on the “fixed” nature of payment obligations. In order to avoid these complications, the Article proposes that the all events tests should recognize an implied requirement of acceptance. Under this proposal, a buyer’s acceptance of goods or services, rather than the seller’s performance, would establish a fixed payment obligation and respect the parties’ efforts to regulate aspects of the sale transaction beyond the mere conveyance of the goods or services.