SECTION 2. BACKGROUND

.01 Section 461(a) of the Internal Revenue Code provides that the amount of any deduction or credit must be taken for the taxable year that is the proper taxable year under the method of accounting used in computing taxable income.

.02 Section 1.461–1(a)(2)(i) of the Income Tax Regulations provides that, under an accrual method of accounting, a liability is incurred, and generally taken into account for federal income tax purposes, in the taxable year in which (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy (requirements (1) and (2) are collectively referred to as the “all events test”), and (3) economic performance has occurred with respect to the liability. See also § 1.446–1(c)(1)(ii)(A).

.03 All the events have occurred that establish the fact of the liability when (1) the event fixing the liability occurs, whether that is the required performance or other event, or (2) the payment is due, whichever happens earliest. Rev. Rul. 2007–3, 2007–1 C.B. 350; Rev. Rul. 80– 230, 1980–2 C.B. 169; Rev. Rul. 79–410, 1979–2 C.B. 213, amplified by Rev. Rul. 2003–90, 2003–2 C.B. 353. .04 Section 461(h)(1) and § 1.461– 4(a)(1) provide that, for purposes of determining whether an accrual basis taxpayer can treat the amount of any liability as incurred, the all events test is not treated as met any earlier than the taxable

year in which economic performance occurs with respect to the liability.

.05 Section 461(h)(2)(A)(i) provides that if the liability of a taxpayer arises out of the provision of services to the taxpayer by another person, economic performance occurs as the person provides those services. See also § 1.461–4(d)(2)(i).

.06 Neither § 461(h)(2)(A)(i) nor § 1.461–4(d)(2)(i) explains when a person has provided services for purposes of satisfying the economic performance requirement in the context of a Ratable Service Contract as described in section 4.02 of this revenue procedure.

.07 There are two exceptions to the general rule of economic performance in § 461(h)(2)(A) that allow a taxpayer to accelerate the accrual of a liability into a year prior to the year that the economic performance requirement is satisfied. These exceptions are the 3½ month rule and the recurring item exception.

.08 Under the 3½ month rule in § 1.461–4(d)(6)(ii), a taxpayer may treat economic performance as occurring as the taxpayer makes payment to the person providing the services if the taxpayer can reasonably expect the person to provide the services within 3½ months after the taxpayer makes the payment.

.09 Under the recurring item exception in § 461(h)(3)(A) and § 1.461–5(b), a liability is treated as incurred for a taxable year if: (i) at the end of the taxable year, all the events have occurred that establish the fact of the liability and the amount can be determined with reasonable accuracy; (ii) economic performance occurs on or before the earlier of (A) the date that the taxpayer files a timely return (including extensions) for the taxable year, or (B) the 15th day of the ninth calendar month after the close of the taxable year; (iii) the liability is recurring in nature; and (iv) either (A) the amount of the liability is not material or (B) the accrual of the liability in the taxable year results in a better matching of the liability with the income to which it relates than would result from accruing the liability for the taxable year in which economic performance occurs. See, Rev. Rul. 2012–1, 2012–1 I.R.B. 255. .10 Section 1.461–4(d)(6)(iv) provides that if different services are required to be provided to the taxpayer under a single

contract, economic performance occurs over the time each service is provided.

.11 In Caltex Oil Venture v. Commis- sioner, 138 T.C. 18, 36 (2012), the Tax Court construed the 3½ month rule as contemplating that all of the services called for under an undifferentiated, nonseverable contract must be provided within 3½ months of payment.

.12 Under § 446(b), the Commissioner has broad authority to determine whether a method of accounting clearly reflects income. Section 1.446–1(c)(2)(ii) provides that the Commissioner may authorize a taxpayer to adopt or change to a permissible method of accounting although the method is not specifically described in the regulations as permissible if, in the opinion of the Commissioner, that method clearly reflects income.

.13 Section 446(e) and § 1.446– 1(e)(2)(i) state that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions necessary to obtain the Commissioner’s consent to effect the change in method of accounting and to prevent amounts from being duplicated or omitted.

.14 Section 481(a) requires adjustments necessary to prevent amounts from being duplicated or omitted by reason of a change in method of accounting.

.15 Rev. Proc. 2015–13, 2015–5 I.R.B. 419, provides the automatic change procedures by which a taxpayer may obtain consent to change to a method of accounting described in the List of Automatic Changes of Rev. Proc. 2015–14, 2015–5 I.R.B. 450.