Newhouse Broadcasting Corp. v. Commissioner

T.C. Memo. 2000-244

UNITED STATES TAX COURT

NEWHOUSE BROADCASTING CORPORATION AND
SUBSIDIARIES, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 19448-97, 23753-97, Filed August 7, 2000.
24489-97, 6210-98.

P and R have both moved for partial summary
judgment on the issue of whether royalties payable by
an accrual basis publisher to authors based upon book
sales, less actual returns, are fully deductible in the

1
Cases of the following petitioners have been consolidated
herewith: Advance Publications, Inc. and Subsidiaries, docket
No. 23753-97; Cox Enterprises, Inc., and Subsidiaries, docket No.
24489-97; and Chronicle Publishing Co., Richard T. Thieriot, Tax
Matters Person, docket No. 6210-98. Such consolidation was made
because of a common issue of eligibility for transition
investment tax credit under cable television franchise
agreements. That issue was addressed on motions for partial
summary judgment in docket No. 19448-97. Petitioner in this case
is petitioner in docket No. 23753-97, and the issue involved is
unique to that petitioner.
 - 2 -

year of the sales or whether the deduction must be
reduced to the extent that payment of the royalties is
withheld as "a reasonable reserve for returns".
Held: The royalties are fully deductible in the
year of sale.

Bernard J. Long, David E. Mills, and James R. Saxenian, for

petitioner.

Gary D. Kallevang and William J. Gregg, for respondent.

MEMORANDUM OPINION

HALPERN, Judge: Both petitioner Advance Publications Inc.

(petitioner) and respondent have moved for partial summary

judgment. Each party objects to the other’s motion. The issue

common to those motions (petitioner’s motion, respondent’s motion

or, together, the motions) is whether petitioner’s deduction for

royalties owed to book authors under agreements between its

publisher subsidiaries and the authors was properly computed for

petitioner’s 1989 and 1990 taxable (calendar) years (the audit

years) by not taking into account a reduction in the royalty

payments to authors for "a reasonable reserve for returns".

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.
 - 3 -

I. Background

For purposes of the motions, the parties have stipulated

certain facts. We accept the stipulated facts as being true for

purposes of deciding the motions. The stipulation of facts, with

attached documents, is incorporated herein by this reference.

The parties have also filed various memoranda of law, some with

attached affidavits, and other documents. The following

recitation of facts is drawn primarily from the stipulation of

facts. Certain other facts (which facts we deem

noncontroversial) are included in that recitation.

Petitioner is a New York corporation with its principal

office in Staten Island, New York. Petitioner, an accrual basis

taxpayer, engaged in the book publishing business during the

audit years through its then wholly owned subsidiary, Random

House, Inc. (Random House), and Random House’s subsidiaries.2

During the audit years, Random House, through its divisions and

subsidiaries, published books under several trade names, known as

"imprints" in the publishing business. Random House’s major

imprints included Random House ("Random House Adult Trade

Imprint"), Alfred A. Knopf, and Ballantine Books, which accounted

for more than 50 percent of its book sales revenue during the

2
Random House was sold to an unrelated third party on
July 1, 1998.
 - 4 -

audit years. Approximately 10 additional imprints accounted for

the remainder of its book sales.

During the audit years, Random House’s publishing business

consisted of the following primary activities: acquisition of

rights to manuscripts, editing manuscripts, contracting for the

manufacture of books, and marketing and selling books. Random

House primarily sold books to individual bookstores, book

wholesalers, book retail chains, mass marketers, and book clubs

(customers). Random House customers sold books purchased from

Random House and other publishers to the general public

(consumers). Under the terms of its sales agreements with

customers, the customers had the right, under certain

circumstances, to return books for full credit.

Random House and its subsidiaries entered into written

contracts with each Random House author or licensor (author

contracts). The principal terms covered by an author contract

included delivery timetables for the manuscripts, royalty rates,

and payment terms. The Random House Adult Trade and Alfred A.

Knopf (Knopf) imprints used one standard form of author contract

and the Ballantine Books division (Ballantine) used another. Over

99 percent of all executed author contracts utilized such standard

contracts. Under the terms of all author contracts, authors

generally earned royalties as a percentage of the publisher’s

invoice price on copies of books sold by the publisher. The
 - 5 -

"invoice price" was defined in each author contract as "the price

shown on the Publisher’s invoices to its wholesaler and retailer

customers from which the Publisher’s wholesaler and retailer

discounts are calculated."

The Ballantine standard author contract provides that "[t]he

Publisher agrees to pay the Author a royalty on the retail price

or, for any hardcover copies, on the invoice price of each copy of

the Work sold by Publisher, less returns". A separate paragraph

of the contract requires Publisher to "render semi-annual

accountings * * * on or before February 1st for the six-month

accounting period ending in the preceding September and on or

before August 1st for the six-month accounting period ending the

preceding March." This paragraph further provides that "[e]ach

statement rendered will be accompanied by payment of the amount

shown to be due thereon, after allowance of a reasonable reserve

for returns and after recoupment of [advances]."

Both the Random House and Knopf standard author contracts

provide that "[t]he Publisher shall pay to the Author a royalty on

the invoice price of every copy sold by the Publisher, less actual

returns and a reasonable reserve for returns".3 The Random House

and Knopf standard author contracts, like the Ballantine form of

3
A few contracts in effect during the audit years, in a
format different from the contracts discussed above, provided for
the withholding of a royalty reserve against future returns only
during the first 2 years following publication.
 - 6 -

contract, also require semiannual accountings and royalty

payments; and the procedures followed with respect to royalties

payable under all three forms of author contract are identical.

Thus, along with the royalty check for the 6-month royalty period,

Random House typically issued a royalty statement to the author

covering such period. Each statement contains a column entitled

"earnings" and a subsequent column entitled "charges". The former

shows cumulative earnings to date based upon total books sold less

total books actually returned through the beginning of the

statement period. Where the prior withholding based upon the

"reasonable reserve for returns" was in excess of the amount

justified by the actual returns for the prior period, the earnings

column also includes an amount for "refund of reserves" (refund of

reserves). Thus, for each 6-month royalty period, the prior

estimated reserve is adjusted to reflect actual experience. The

"charges" column includes an amount representing actual returns

for the period and an amount for the "current reserve for

returns". These charges are an offset to any royalty based on

sales that might otherwise be due for the period.

Random House was contractually required to, and did, pay

royalties with respect to books that were sold and not returned,

even though Random House never received payment for the books and

wrote off the debt as uncollectible (e.g., because of the

customer’s bankruptcy). The royalty payable upon the sale of a
 - 7 -

book was reversible only in the event of a subsequent return of

the book by the customer.

In computing Random House’s income each year for financial

statement purposes, petitioner took into account the revenue

attributable to books sold to customers during the year, less the

revenue attributable to books actually returned by customers

during such year. This amount was adjusted by the difference

between the "reserve for returns" (reserve for returns) at the

beginning and at the end of the year; i.e., an increase in the

reserve for returns would be subtracted from sales. The reserve

for returns adjustment represented the revenues attributable to

books sold during a particular year that Random House estimated

would be returned during the subsequent year. These factors

resulted in the figure "net sales" appearing on the financial

statements.

The financial statements also took into account, as an

expense each year, royalties payable on book sales, less books

actually returned by customers, during such year. This amount was

adjusted by the difference between the "royalty reserve" (royalty

reserve) at the beginning and at the end of the year; i.e., an

increase in the royalty reserve would be subtracted from the

amount of the royalty expense. The royalty reserve adjustment

represented the royalties attributable to the books sold during a

particular year that Random House estimated would be returned
 - 8 -

during the subsequent year. Therefore, for financial statement

purposes, each year’s royalty expense reflected a reduction for

royalties attributable to the estimated subsequent year’s returns.

According to Random House’s books, the beginning and end of

year balances of the reserve for returns for the audit years were

as follows:

1989 1990

Balance in reserve for returns $63,652,154 $93,923,107
beginning of year

Balance in reserve for returns 93,923,107 96,957,702
end of year

Net increase to reserve 30,270,953 3,034,595
for returns

According to Random House’s books, the beginning and end of

year balances of the royalty reserve for the audit years were as

follows:

1989 1990

Balance in royalty reserve $7,327,000 $9,230,000
beginning of year

Balance in royalty reserve 9,230,000 10,278,077
end of year

Net increase to royalty reserve 1,903,000 1,048,077

For tax purposes, Random House reversed those financial

statement reserve adjustments. Accordingly, to arrive at net

sales for income tax purposes, Random House increased financial

statement net sales by $30,270,953 for 1989 and $3,034,595 for
 - 9 -

1990, and, to arrive at royalty expense for income tax purposes,

Random House increased financial statement royalty expense by

$1,903,000 for 1989, and $1,048,077 for 1990.4 Respondent

disputes only the latter adjustment to Random House’s financial

statement income.

The parties disagree on whether the annual adjustments to the

royalty reserve for financial statement purposes were the same as

the annual amounts withheld from the royalties paid to authors as

a "reasonable reserve for returns" (reasonable reserve for

returns). Petitioner alleges that the financial statement reserve

for returns and royalty reserve were determined on a completely

different basis than the reasonable reserve for returns withheld

from the royalty payments to authors. The former were Generally

Accepted Accounting Principles (GAAP) reserves whereas the latter

was determined on an author-by-author basis as a cash management

device, and was intended to protect Random House against the

possibility of a payment of royalties to an author in one

accounting period and the company’s subsequent inability to

recover royalties from that author (based upon returns) in a later

accounting period. According to petitioner, the amount of

royalties actually withheld from authors is not known,

4
In determining taxable income and deductible royalty
expense attributable to the sale of soft cover books, Random
House did take into account subsequent year returns to the extent
permitted by sec. 458.
 - 10 -

individually or in the aggregate, because petitioner saw no need

to keep a record of such amounts. In petitioner’s view, they were

irrelevant for both financial and tax reporting purposes.

Petitioner, therefore, concludes that respondent’s proposed

reversal of petitioner’s royalty expense deductions, by focusing

on the financial statement royalty reserve, necessarily focuses on

an incorrect amount.

Respondent responds that the alleged difference between the

financial statement royalty reserve and the amounts actually

withheld from authors "cannot be readily corroborated one way or

the other",5 and that petitioner has not "adduced any specifics to

establish the extent to which * * * [the two amounts] may have

differed". Respondent also argues that "[u]nless * * *

[petitioner] wishes to admit that its financial statements are

grossly unreliable, [petitioner’s] adjustments to the royalty

reserves should be considered reasonably accurate as to the

overall expense deduction at issue." It is apparently on that

basis, and on the basis that respondent views any difference

between the two amounts as "irrelevant to the resolution of the

legal issue", that respondent justifies his proposed increase in

petitioner’s income for the audit years by the amount of the

5
Petitioner’s position is based upon affidavits filed by
the former general counsel and the former chief financial officer
of Random House.
 - 11 -

increase in the financial statement royalty reserve for such

years.

II. Summary Judgment

A summary judgment is appropriate "if the pleadings, answers

to interrogatories, depositions, admissions, and any other

acceptable materials, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that a

decision may be rendered as a matter of law." Rule 121(b). "A

partial summary adjudication may be made which does not dispose of

all the issues in the case." Id. Summary judgment is a device

used to expedite litigation and is intended to avoid unnecessary

and expensive trials of phantom factual questions. See, e.g.,

Espinoza v. Commissioner, 78 T.C. 412, 415-416 (1982). It is not,

however, a substitute for a trial in that disputes over factual

issues are not to be resolved in such proceedings. See id. The

party moving for summary judgment has the burden of showing the

absence of a genuine issue as to any material fact. See id.

III. Discussion

A. Arguments of the Parties

Respondent argues that, because the author contracts provide

that Random House is liable to pay a royalty amount that subtracts

a reasonable reserve for returns, Random House does not owe its

authors the amount of the reasonable reserve for returns. Because

petitioner does not owe this amount, and because it does not
 - 12 -

anticipate that a royalty will be paid for such amount, petitioner

fails to satisfy the section 461 "all events test" with respect to

the reserve amount as of the end of the taxable year. Therefore,

its annual tax accrual for royalty expense must be reduced by such

amount. Respondent agrees that a book reserve based upon GAAP

principles is not normally taken into account for tax purposes,

but where, as in this case, the contracts establishing the

taxpayer’s liability specifically reduce that liability by the

amount of the reserve, it is the contract terms and not GAAP

principles that require the same reduction in liability for tax

purposes. Respondent summarizes his position as follows:

Quite simply, an accrual taxpayer cannot accrue as an
expense what it does not legally owe, and petitioner
does not owe payment for the "reasonable reserve for
returns" that is to be subtracted from the royalty
payment when payment is made.

Petitioner counters that "the logical and plain reading" of

those portions of the author contracts that pertain to author

royalties is that Random House and its subsidiaries owe royalties

for all books sold and not actually returned by the end of each

6-month royalty accounting period, but that the obligation to pay

a portion of these royalties is deferred to a later period as

security against the possibility of future returns. Petitioner

argues that respondent erroneously treats that reduction in the

amount of royalties payable to authors as a reduction in the

amount of royalties owed to the authors as of the end of the
 - 13 -

taxable year. Petitioner further argues that withholding payment

of a liability accrued in one taxable year pending the outcome or

occurrence of an event in a subsequent taxable year does not

reduce the accrual by the amount of the withheld payment.

Petitioner concludes that, because a delay in the payment of an

accrued liability does not delay its deductibility by an accrual

basis taxpayer, petitioner’s deduction for royalties owed to its

authors may not be reduced by the amounts withheld as a reasonable

reserve for returns.

Petitioner additionally argues that, because respondent’s

determination of deficiency is based upon the yearend financial

statement royalty reserve rather than upon the royalties that were

actually withheld from authors, it is "arbitrary and erroneous and

cannot be sustained".6

B. Analysis

1. Proper Royalty Accrual

In general, a liability may be taken into account for Federal

income tax purposes by an accrual method taxpayer in the taxable

year in which all the events have occurred that establish the fact

6
A finding that a determination of deficiency is arbitrary
and without foundation would not, in and of itself, require that
we grant petitioner’s motion for summary judgment. Rather, we
would be constrained to deny respondent’s motion for summary
judgment and require respondent to sustain what then would be
respondent’s burden of going forward with evidence to show the
correctness of the deficiency determination. See Helvering v.
Taylor, 293 U.S. 507 (1935); Shriver v. Commissioner, 85 T.C. 1,
3 (1985); Franklin v. Commissioner, T.C. Memo. 1993-184.
 - 14 -

of the liability, the liability can be determined with reasonable

accuracy, and economic performance has occurred with respect to

the liability. See sec. 1.461-1(a)(2), Income Tax Regs. The

first two requirements comprise the "all events test" for accrual

of a liability. See sec. 461(h)(4). The parties are in agreement

that the amount of petitioner’s liability for royalty expense can

be determined with reasonable accuracy. Respondent also

acknowledges that economic performance has occurred. See sec.

461(h)(2)(A)(iii); secs. 1.461-4(d)(3)(ii) and 1.461-4(d)(7)

Example (9), Income Tax Regs., which provide, in effect, that

economic performance with respect to a royalty based upon sales

during the taxable year, arising from the use of property, occurs

as the sales occur during such taxable year. We are, therefore,

left to decide whether all of the events had occurred as of the

end of each of the audit years that established petitioner’s

liability for royalties attributable to book sales for those

years, including amounts representing royalties that had been

withheld from the authors as "a reasonable reserve for returns".

a. The Author Contracts

The three forms of author contract (the contracts) are

ambiguous with respect to the royalties due the author at yearend

because the contracts discuss authors’ royalties solely in terms

of the amount payable at the royalty payment dates rather than in

terms of the amount owed. Thus, under the contracts, the
 - 15 -

publisher (either Random House, Knopf, or Ballantine, hereafter

generally referred to as Random House) agrees to pay the author a

royalty based upon sales less "actual returns" and less "a

reasonable reserve for [future] returns". The contracts require

semiannual royalty payments and accompanying "statements of

account" or "accountings". An examination of the manner in which

the semiannual royalty payments were determined pursuant to the

contemporaneous statements of account reveals, however, that the

royalties owed by Random House to its authors at any given point

in time were, as urged by petitioner, based upon book sales less

actual returns.

As noted above, the royalty statements of account furnished

by Random House itemize the royalties due the author on the basis

of total books sold less total books actually returned through the

beginning of the statement period. In addition, an adjustment is

made for the excess, if any, of the prior period withholding of

royalties based upon the reasonable reserve for returns over the

royalty reduction justified by actual returns during the statement

period, i.e., the statement reflects an additional amount for

refund of reserves, and such amount is included in the royalty

payment for the statement period. The balance of the payment for

the statement period is based upon sales of books less actual

returns for such period, and less the current reasonable reserve

for returns.
 - 16 -

"Generally speaking, the practical interpretation of a

contract by the parties to it for any considerable period of time

before it comes to be the subject of controversy is deemed of

great, if not controlling, influence." Old Colony Trust Co. v.

City of Omaha, 230 U.S. 100, 118 (1913). That principle has been

applied in tax controversies involving one of the parties to the

contract. See W.S. Badcock Corp. v. Commissioner, 491 F.2d 1226,

1230 (5th Cir. 1974), revg. 59 T.C. 272 (1972)7: “We * * * look

to that most reliable indicator of what the contracting parties

meant: what they did." See also Diehl v. Commissioner, 1 T.C.

139, 144 (1942), affd. 142 F.2d 449 (6th Cir. 1944), and Connally

v. Commissioner, T.C. Memo. 1961-312, both of which cite with

approval the admonition of the Supreme Court in Insurance Co. v.

Dutcher, 95 U.S. 269, 273 (1877): "There is no surer way to find

out what the parties meant, than to see what they have done."

7
We note that the reversals of this Court in W.S. Badcock
Corp. v. Commissioner, 491 F.2d 1226 (6th Cir. 1974), revg. 59
T.C. 272 (1972), and in two cases cited infra, Ohmer Register Co.
v. Commissioner, 131 F.2d 682 (6th Cir. 1942), revg. a Memorandum
Opinion of this Court, and Central Cuba Sugar Co. v.
Commissioner, 198 F.2d 214 (2d Cir. 1952), affg. in part and
revg. in part 16 T.C. 882 (1951), were not based upon any
disagreement by this Court with the legal principles for which
those cases are cited herein. Rather, the reversals were based
upon the appellate courts’ rejection of our factual finding, in
each case, that the employees had not earned, and the taxpayer
did not owe, any sales commissions until a year subsequent to the
year of sale; i.e., there was disagreement whether the payment
contingency was a condition precedent or a condition subsequent
to a fixed commission obligation. See the discussion of this
distinction, infra.
 - 17 -

Ultimately, the authors were entitled to be paid (and, in

fact, were paid) royalties on all books that were sold and not

actually returned, including unreturned books for which payment

was never received by Random House. Therefore, based upon the

parties’ conduct under the contracts, we find that the withholding

of royalties representing a reasonable reserve for returns

constituted a delay in the payment of royalties otherwise due the

authors for each statement period in anticipation of actual

returns during the subsequent statement period.

b. Discussion of Authorities

We agree with petitioner that this case is governed by the

rule of law which states that the deduction of a liability that

otherwise satisfies the all events test is not negated by the

taxpayer’s right to defer payment of the liability pending the

occurrence (or nonoccurrence) of some event after the close of the

taxable year. See Lawyers’ Title Guar. Fund v. United States, 508

F.2d 1, 6 (5th Cir. 1975); W.S. Badcock Corp. v. Commissioner,

supra; Ohmer Register Co. v. Commissioner, 131 F.2d 682, 686 (6th

Cir. 1942), revg. a Memorandum Opinion of this Court; Central Cuba

Sugar Co. v. Commissioner, 198 F.2d 214, 217-218 (2d Cir. 1952),

affg. in part and revg. in part 16 T.C. 882 (1951); Warren Co. v.

Commissioner, 46 B.T.A. 897, 913-914 (1942), affd. 135 F.2d 679,

rehearing denied 136 F.2d 685 (5th Cir. 1943). As stated by the

Court of Appeals for the Fifth Circuit in Lawyers’ Title Guar.
 - 18 -

Fund v. United States, supra at 6: "‘The all events test’ is

recognized but regarded as not failed merely because a ‘condition

subsequent’ may interfere with actual payment"; see also Central

Cuba Sugar Co. v. Commissioner, supra. In the cases cited, the

taxpayer was obligated to pay a fixed commission based upon sales

that had occurred by the end of the taxable year, although actual

payment of the commission was predicated upon events transpiring

after the close of the taxable year. For example, in Ohmer

Register Co. v. Commissioner, supra at 683, as in this case, where

the royalties to authors were reduced to take account of returns,

a commission credited to a sales agent on the original sale would

be reversed should the company be required to "take back the

product sold", i.e., should the product be returned. In Ohmer

Register Co., as in the other cited cases, the taxpayer was

allowed to deduct commissions due with respect to sales in the

year of the sales, rather than in the subsequent year when the

obligation to actually pay the commissions was discharged. The

court noted that "[t]he fact that the agent might not, in the end

[,] receive his full commission is no more material than that the

petitioner might not receive full payment of the purchase price of

the article sold." Id. at 686.

In Helvering v. Russian Fin. & Constr. Corp., 77 F.2d 324,

327 (2d Cir. 1935), affirming a Memorandum Opinion of this Court,

the Court of Appeals for the Second Circuit stated the applicable
 - 19 -

rule as follows: “That the liability may not subsequently be

discharged by payment does not necessarily prevent its

consideration as a liability for the years accrued. * * * The

existence of an absolute liability is necessary; absolute

certainty that it will be discharged by payment is not." See also

United States v. Hughes Properties, Inc., 476 U.S. 593, 606

(1986).

The cases upon which respondent places principal reliance

(United States v. General Dynamics Corp., 481 U.S. 239 (1987);

ABKCO Indus., Inc., v. Commissioner, 56 T.C. 1083 (1971), affd.

482 F.2d 150 (3d Cir. 1973); Field Enters., Inc. v. United States,

172 Ct. Cl. 77, 348 F.2d 485 (1965)) are inapposite. In each of

these cases the Court found that the taxpayer’s liability for the

payments in question (in General Dynamics Corp, claims for medical

benefits; in ABKCO Indus., royalties; and in Field Enters., Inc.,

"quality bonuses") was contingent upon the prior occurrence of a

particular event (a condition precedent). In this case, all of

the events that fixed the author’s right to royalties had occurred

by the end of the taxable year (i.e., the completed sales of

books). That a portion of these royalties was withheld and might

never be paid because of returns in a subsequent taxable year does

not negate petitioner’s right to accrue the royalty expense in the

year of sale.
 - 20 -

The parties also dispute whether respondent’s position gives

rise to an improper mismatching of income and expense. This

dispute is largely beside the point in light of our conclusion

that Random House’s obligation to pay royalties to its authors in

the year of sale, undiminished by the amounts withheld as "a

reasonable reserve for returns", constituted a proper accrual

under the all events test. Where, as here, both the income and

expense items relating to the same transaction meet the tax

requirements for accrual, matching is appropriate and desirable.

See Warren Co. v. Commissioner, 46 B.T.A. 897, 913-914 (1942),

affd. 135 F.2d 679, rehearing denied 136 F.2d 685 (5th Cir.

1943).8

8
An exception to the deduction of an expense that
otherwise satisfies the all events test has been made under
circumstances in which payment of the expense would have been
delayed for such a substantial period that there was a violation
of the clear reflection of income standard. See Mooney Aircraft,
Inc. v. United States, 420 F.2d 400 (5th Cir. 1970) and Ford
Motor Co. v. Commissioner, 102 T.C. 87 (1994), affd. 71 F.3d 209
(6th Cir. 1995); see also Exxon Mobil Corp. v. Commissioner, 114
T.C. 293, 323 (May 3, 2000). Also, exceptions to the principle
that related income and expense items should be accrued in the
same taxable year have been made where the tax law specifically
requires, or permits, the acceleration, or deferral, of one, but
not both, of these items. See, e.g., Marcor, Inc. v.
Commissioner, 89 T.C. 181 (1987), where we allowed a current
deduction for certain preparation and installation costs under
circumstances in which the related fees for these services were
considered part of the payments for merchandise, the reporting of
which was deferred under the statutorily permitted installment
method. No such exception to the normal rules of expense accrual
or to the matching principle pertains to this case.
 - 21 -

We hold that, for the audit years, petitioner was entitled to

a deduction for royalties due with respect to books sold during

the year, less returns, without reduction for royalty payments

withheld from the authors during the year as "a reasonable reserve

for returns."

2. Whether the Determination of Deficiency Was
Arbitrary

Because of our holding that any reduction in petitioner’s

accrual deduction for royalties is improper, it is unnecessary to

address petitioner’s argument that the amount of respondent’s

proposed deficiency is "arbitrary and erroneous and cannot be

sustained".

C. Conclusion

Petitioner’s motion for partial summary judgment shall be

granted and respondent’s motion for partial summary judgment shall

be denied.

An appropriate order

will be issued.