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CCH (cch.taxgroup.com) reports:

  An accrual based parent corporation was required to include in its consolidated income deferred payments from the sale of barges manufactured by its subsidiary. Under the contract to sell the barges, a portion of the payments were due 18 months after the delivery of each barge. The deferred payments were excluded by the parent because they were withheld by customers in order to offset agreed-upon damages incurred under a previous barge sale contract.

  As an accrual basis taxpayer, the parent was required to accrue the deferred payments for the barges in the year that all of the events occurred to fix the right to the income. The delivery of the barges unconditionally fixed the right to receive the full contract price, including the deferred payments, in the year of delivery. The customers' offset claim did not prevent the accrual of the income. The customers did not dispute the fact or the amount of the obligation under the contract and there was no question as to whether the right to receive income was vitiated by a contractual provision for withholding a portion of the sales price. The offset claims affected only the timing of the receipt of the income under the contract and not the right to receive the income. Moreover, the deferred payments did not fall within the income-accrual exception because there was no evidence that the deferred payments were uncollectible as a result of insolvency, bankruptcy or other financial conditions of the customers. It was only in the tax year after the barges had been delivered and the right to income had been fixed that the customers asserted their right to an offset for the damages from the previous contract.

  Additionally, the withheld deferred payments could not be deducted in the year as an amount transferred to satisfy a contested liability in the tax year the income accrued. The withholding of the deferred payments did not constitute a transfer of property in the same tax year in satisfaction of a liability. In the year the barges were delivered and the income accrued, the deferred payments were not yet due and so could not have been withheld. Additionally, the withholding of the deferred payments did not constitute a transfer. The deferred payments withheld by the customers were not in the control of the subsidiary. In the year the income accrued, there was no order of any competent legal authority to force the subsidiary to transfer the funds that were owed.

Trinity Industries, Inc., 132 TC No. 2, Dec. 57,718

Other References:

 
Code Sec. 451

  CCH Reference - 2009FED ¶21,005.756

 
Code Sec. 461

  CCH Reference - 2009FED ¶21,817.225

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 9,050

  CCH Reference - TRC ACCTNG: 12,058