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In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, to provide guidance on revenue recognition for publicly traded companies. The bulletin offered a range of fact patterns with conclusions on the proper timing of revenue recognition for financial statement purposes. As a result of SAB 101, some companies deferred recognizing revenue for financial statement purposes and, concomitantly, for income tax purposes. Letter Ruling (TAM) 200310003 addresses two issues that have faced many such taxpayers: whether the deferral of revenue recognition was an accounting-method change requiring IRS consent, and whether such deferral would clearly reflect income for tax purposes.
Facts
The taxpayer, a publicly traded company, provided telecommunication systems and related products and services to its customers. One segment of its business included the sale of small systems that required limited customization and typically took several months to complete.
The sales agreement stated that system delivery would be made free on board taxpayers place of business, and title and risk of loss would pass to the customer on delivery to the carrier. Final payment was due when the taxpayer's employees tested and certified the system's functionality or when the customer used the system. Finally, the customer had 10 days to notify the taxpayer, in writing, if the system was nonconforming, giving the taxpayer an opportunity to recertify the system within 90 days of the notice.
Prior to SAB 101, the taxpayer...