[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.461-2T]

[Page 268-269]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.461-2T  Contested liabilities (temporary).

    (a) and (b) [Reserved]. For further guidance, see Sec. 1.461-2(a) 
and (b).
    (c) Transfer to provide for the satisfaction of an asserted 
liability--(1) In general. (i) A taxpayer may provide for the 
satisfaction of an asserted liability by transferring money or other 
property beyond his control to--
    (A) The person who is asserting the liability;
    (B) An escrowee or trustee pursuant to a written agreement (among 
the escrowee or trustee, the taxpayer, and the person who is asserting 
the liability) that the money or other property be delivered in 
accordance with the settlement of the contest;
    (C) An escrowee or trustee pursuant to an order of the United States 
or of any State or political subdivision thereof or any agency or 
instrumentality of the foregoing, or of a court, that the money or other 
property be delivered in accordance with the settlement of the contest; 
or
    (D) A court with jurisdiction over the contest.
    (ii) In order for money or other property to be beyond the control 
of a taxpayer, the taxpayer must relinquish all authority over the money 
or other property.
    (iii) The following are not transfers to provide for the 
satisfaction of an asserted liability--
    (A) Purchasing a bond to guarantee payment of the asserted 
liability;
    (B) An entry on the taxpayer's books of account;
    (C) A transfer to an account that is within the control of the 
taxpayer;
    (D) A transfer of any indebtedness of the taxpayer or of any promise 
by the taxpayer to provide services or property in the future; and
    (E) A transfer to a person (other than the person asserting the 
liability) of any stock of the taxpayer or of any stock or indebtedness 
of a person related to the taxpayer (as defined in section 267(b)).
    (c)(2) through (d) [Reserved]. For further guidance, see Sec. 
1.461-2(c)(2) through (d).
    (e) Deduction otherwise allowed--(1) [Reserved]. For further 
guidance, see--Sec. 1.461-2(e)(1).
    (2) Application of economic performance rules to transfers under 
section 461(f). (i) A taxpayer using an accrual method of accounting is 
not allowed a deduction under section 461(f) in the taxable year of the 
transfer unless economic performance has occurred.
    (ii) Economic performance occurs for liabilities requiring payment 
to another person arising out of any workers compensation act or any 
tort, or any other liability designated in Sec. 1.461-4(g),

[[Page 269]]

as payments are made to the person to which the liability is owed. 
Except as provided in section 468B or the regulations thereunder, 
economic performance does not occur when a taxpayer transfers money or 
other property to a trust, an escrow account, or a court to provide for 
the satisfaction of an asserted workers compensation, tort, or other 
liability designated under Sec. 1.461-4(g) that the taxpayer is 
contesting unless the trust, escrow account, or court is the person to 
which the liability is owed or the taxpayer's payment to the trust, 
escrow account, or court discharges the taxpayer's liability to the 
claimant. Rather, economic performance occurs in the taxable year the 
taxpayer transfers money or other property to the person that is 
asserting the workers compensation, tort, or other liability designated 
under ``Sec. 1.461-4(g) that the taxpayer is contesting or in the 
taxable year that payment is made from a trust, an escrow account, or a 
court registry funded by the taxpayer to the person to which the 
liability is owed.
    (3) Examples. The provisions of this paragraph (e) are illustrated 
by the following examples:

    Example 1. [Reserved]. For further guidance, see Sec. 1.461-
2(e)(3), Example 1.

    Example 2. Corporation X is a defendant in a class action suit for 
tort liabilities. In 2002, X establishes a trust for the purpose of 
satisfying the asserted liability and transfers $10,000,000 to the 
trust. The trust does not satisfy the requirements of section 468B or 
the regulations thereunder. In 2004, the trustee pays $10,000,000 to the 
plaintiffs in settlement of the litigation. Under paragraph (e)(2) of 
this section, economic performance with respect to X's liability to the 
plaintiffs occurs in 2004. X may deduct the $10,000,000 payment to the 
plaintiffs in 2004.

    (f) [Reserved]. For further guidance, see Sec. 1.461-2(f).
    (g) Effective date. (1) Except as otherwise provided, this section 
applies to transfers of money or other property in taxable years 
beginning after December 31, 1953, and ending after August 16, 1954.
    (2) Paragraph (c)(1)(iii)(E) of this section applies to transfers of 
any stock of the taxpayer or any stock or indebtedness of a person 
related to the taxpayer on or after November 19, 2003.
    (3) Paragraph (e)(2)(i) of this section applies to transfers of 
money or other property after July 18, 1984.
    (4) Paragraphs (e)(2)(ii) and (e)(3) of this section apply to--
    (i) Transfers after July 18, 1984, of money or other property to 
provide for the satisfaction of an asserted workers compensation or tort 
liability; and
    (ii) Transfers in taxable years beginning after December 31, 1991, 
of money or other property to provide for the satisfaction of asserted 
liabilities designated in Sec. 1.461-4(g) (other than liabilities for 
workers compensation or tort).

[T.D. 9095, 68 FR 65636, Nov. 21, 2003]