AI$/$CT$9-86($LO $9-4)$

Assume you asked your favorite AI learning tool "Please describe the all events test for recognizing taxable income." and the AI tool responded as follows:

The all events test is a rule that determines when an item of income or expense is recognized for tax purposes. The test is based on the principle that income or expense should be reported in the period in which it is earned or incurred, rather than when it is received or paid.

For income, the all events test is met when:

$$ The taxpayer has a fixed right to receive the income, and

$$ The amount of the income can be determined with reasonable accuracy.

For example, if a taxpayer sells goods or services on credit, the income is recognized when the sale is made, not when the payment is received. The taxpayer has a fixed right to receive the income at the time of the sale, and the amount of the income can be determined with reasonable accuracy.

For expenses, the all events test is met when:

$$ All events have occurred that establish the fact of the liability, and

$$ The amount of the liability can be determined with reasonable accuracy, and

$$ Economic performance has occurred.

For example, if a taxpayer incurs an expense for services rendered by another person, the expense is recognized when the services are performed, not when the payment is made. The fact of the liability is established when the services are performed, the amount of the liability can be determined with reasonable accuracy, and economic performance occurs when the services are provided.

The all events test is modified by certain provisions of the Internal Revenue Code that provide special methods of accounting for certain items of income or expense. For instance, Section $451($b$)$ provides that an accrual method taxpayer cannot defer the recognition of income beyond the period in which it is reported as revenue in an applicable financial statement or other specified financial statement. Section $451($c$)$ provides that an accrual method taxpayer can elect to defer the recognition of certain advance payments for goods, services, or other items until the next taxable year. Section $1275$ provides rules for the recognition of income or expense from certain debt instruments with original issue discount or market discount.

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