Accrued Expenses Included in Income

So recently I had to work on a corporate tax return for a client where there were liabilities for accrued expenses for prior years.  This company is no longer operating.

However, I had been presented with the task of drafting the financials for previous years and file the tax returns to bring them current.  A corporation that is not operating still must file a tax return and report its income and deductions (if any) to the taxing authorities (in this case to IRS and State).

After the accruals had been booked, the expenses were still not paid in subsequent years. 

How does the IRS treat unpaid debt for an individual?

An individual will normally receive a form 1099-C from the creditor and must report the forgiven debt into income unless they qualify to exclude this debt.  However, debt that is forgiven is still income even if a form 1099-C has not been received.  

How should liabilities for accrued expenses be treated if not subsequently paid?

If a business accrues expenses and does not pay them in the future, then theoretically those funds are available for other uses.  In the case of Bear MFG v U.S. (1970), royalty expense was accrued but not paid. Consequently, the court determined the accrued royalty expense should be included in income after the period in which the accruals were booked.

Accruing expenses is an important of accounting however, professionals need to be aware that liabilities cannot remain on the balance sheet perpetually.  The appropriate treatment of unpaid liabilities is to reclass them to income when it is known that they will not be paid.