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Section 451.--General Rule for Taxable Year of Inclusion
26 CFR 1.451-1: General rule for taxable year of inclusion.
Accrual of income. This ruling addresses the accrual of gross income when a taxpayer's customer disputes its liability to the taxpayer because of (1) a clerical mistake in a sales invoice, (2) the shipment of the wrong goods, or (3) the shipment of more items than the customer ordered.
ISSUES
(1) Under the all events test of 451 of the Internal Revenue Code, when does a taxpayer using an accrual method of accounting accrue gross income if the taxpayer ships goods and the customer disputes its liability to the taxpayer because of a clerical mistake in the sales invoice discovered in the next taxable year?
(2) Under the all events test of 451, when does a taxpayer using an accrual method of accounting accrue gross income if the taxpayer ships the wrong goods and the customer disputes its liability during the taxable year of sale?
(3) Under the all events test of 451, when does a taxpayer using an accrual method of accounting accrue gross income if the taxpayer ships more items than the customer ordered, the excess quantity is discovered by the customer in the next taxable year, and, in accordance with an agreement with the customer, the taxpayer reduces the quantity that would otherwise have been included in the next shipment?
FACTS
Taxpayer P manufactures products H and M and sells them to retailers for resale. P uses an accrual method of accounting and a calendar taxable year. For federal income tax purposes, P recognizes gross income from sales of products H and M when it ships the product to the retailer.
Situation 1. In October 2002, X, a retailer, orders 1,000 cases of product M from P at a price of $15 per case. In November 2002, P ships 1,000 cases of M to X and sends X an invoice for the 1,000 cases of M. As the result of a data entry mistake, the amount of the invoice is improperly stated as $16,000 rather than $15,000. In January 2003, X notifies P of the erroneous invoice and P acknowledges that it is entitled to receive only $15,000 for the 1,000 cases of...