Gray Company, a calendar year taxpayer, allows customers to return defective merchandise for a full refund within 30 days of the purchase. In 2017, the company refunded $400,000 for claims involving sales. The $400,000 consisted of $350,000 in refunds from 2017 sales and $50,000 in refunds from 2016 sales. All of the refunds from 2016 sales were for claims filed in 2016 and were paid in January

Question

and February 2017 . At the end of 2017, the company had $12,000 in refund claims for sales in 2017 for which payment had been approved. These claims were paid in January 2017 . Also in January 2017, the company received an additional $30,000 in claims for sales in 2017 . This $30,000 was paid by Gray in February 2018 . With respect to the above, Gray can deduct:
a. $350,000 in 2017.
b. $362,000 in 2017.
c. $392,000 in 2016.
d. $442,000 in 2017.
e. None of the above.

Answer 1

b
RATIONALE: The $350,000 claims paid in 2017 for 2017 sales are deductible in that year. The $50,000 in claims from 2016 sales should have been deducted in 2016 under the recurring item exception. The $12,000 paid in January 2018 for sales in 2017 can be deducted in 2017 under the recurring item exception. The all-events test was satisfied in 2017 when claims for $12,000 were approved. Economic performance (payment) occurred within 8 1/2 months after the end of 2017 . The all-events test was not satisfied for the $30,000 of claims for 2017 sales that were received in January 2018 and paid in February 2018.