Common use of Deferred payment liabilities Clause in Contracts

Deferred payment liabilities. X is a C corporation using the cash method that elects to become an S corporation on Janu- ary 1, 1996. In 1995, X lost a lawsuit and be- came obligated to pay $150,000 in damages. Under section 461(h)(2)(C), this amount is not allowed as a deduction until X makes pay- ment. In 1996, X makes payment and prop- erly claims a deduction for the amount of the payment. Under paragraph (b)(2) of this section, the $150,000 deduction allowed in 1996 is recognized built-in loss because it would have been allowed as a deduction against gross income before the beginning of the rec- ognition period if X had been an accrual method taxpayer (disregarding section 461(h)(2)(C) and § 1.461–4(g)).