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Proposed Regulation – All Events Test for Recognizing Income

Proposed Regulations Released on Applicable Financial Statement for All-Events Test

For a taxpayer using an accrual method of accounting, the all-events test is not met for items of gross income any later than when is included in revenue on an applicable financial statement (AFS) or other financial statement specified by the Treasury Secretary. How the AFS income inclusion rule applies to accrual method taxpayers with an AFS is described and clarified by Proposed Regulation Section 1.451-3.

Year-by-Year Application

The proposed regulations provide that the AFS income inclusion rule generally applies to accrual method taxpayers with an AFS when the timing of income inclusion for one or more items of income is determined using the all-events test. They further clarify that the AFS income inclusion rule applies only to taxpayers that have one more AFS covering the entire tax year.

The AFS income inclusion rule applies on a year-by-year basis and, therefore, an accrual taxpayer with an AFS can only apply the AFS income inclusion rule in the tax year that it has an AFS.

No Change to Income Tax Treatment

The proposed regulations also clarify that AFS income inclusion rule does not change the treatment of a transaction for federal income tax purposes:

  • The treatment of a transaction or event in a tax year may be different for federal income tax and AFS purposes.
  • The applicability of any exclusion provision, or the treatment of nonrecognition transactions, in the Code, the Income Tax Regulations, or other guidance does not change.

Partial Payment

The proposed regulations provide that an amount included in the transaction price for AFS purposes may not be treated as contingent on the occurrence or nonoccurrence of a future event if the taxpayer has been paid or has an equitable, contractual, or other right to partial payment for performance completed to date. Additionally, that transaction price may not be reduced for amounts subject to Internal Revenue Code (IRC) Section 461, including reward amounts in credit card transactions.

Special Methods and Multi-Year Contracts

The proposed regulations clarify that when a taxpayer uses a special method of accounting, the special method of accounting determines the timing of the income inclusion. Proposed regulations also provide guidance for taxpayers with a financial reporting period that is different than the taxpayer’s tax year. The taxpayer must use one of three permissible methods in order to determine whether an item of income has been included in revenue on an AFS.

For a contract with multiple performance obligations, the allocation of the transaction price to each performance obligation equals the amount allocated to each performance obligation for purposes of including the item in revenue in the taxpayer’s AFS. The proposed regulations clarify that a transaction price does not include amounts collected on behalf of third parties, or amounts that are contingent on the occurrence or nonoccurrence of a future event.

A taxpayer with a multi-year contract applies the all events test by applying a cumulative approach reflecting amounts previously included under IRC Section 451 rather than an annualized approach.


Under the proposed regulations, if the taxpayer does not treat a fee as a discount or as an adjustment to the yield of a debt instrument over the life of the instrument (such as points) in its AFS, and the fee otherwise would be treated as creating or increasing original issue discount (OID) for federal income tax purposes (specified fee), then the rules in the proposed regulations under IRC Section 451(b) apply before the rules in IRC Sections 1271 through 1275. Removing specified fees and specified credit card fees from the calculation of OID will permit taxpayers to apply only the rules of IRC Section 451(b) to these fees, without also having to apply the rules relevant to OID.
The proposed section regulations would not apply to determine the time at which OID generally is includible in income.

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