The rules for the deductibility of prepaid expenses are riddled with exceptions to the basic premise that neither cash nor accrual-basis taxpayers ought to deduct any prepayment except to the extent that the purchase - whether it is in the form of an asset or a service - is used in the same tax year. Grace periods, exceptions and additional restrictions can all change a result. The latest variation on the theme of "things are not always what they appear," comes in the form of a chief counsel's advice memorandum.

AM 2007-009 holds that the exceptions to the economic performance rule in determining when a prepayment is deductible must be applied "all-or-nothing." The chief counsel's office believes that neither the three-and-a-half-month rule in Reg. §1.461-4(d)(6) nor the recurring item exception in Reg. §1.461-5 authorize a taxpayer to apportion a deduction so that part of the total deduction may be taken in an earlier tax year.

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