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

United States v. General Dynamics

No. 85-1385

Argued January 13, 1987
Decided April 22, 1987
481 U.S. 239

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE FEDERAL CIRCUIT

Syllabus

Under the "all events" test, as embodied in Treasury Regulations, an accrual-basis taxpayer is entitled to deduct a business expense for the taxable year in which all events have occurred which determine the fact of the taxpayer’s liability, and in which the amount of that liability can be determined with reasonable accuracy. In the year at issue, a consolidated federal income tax return was filed by General Dynamics Corporation and several of its wholly owned subsidiaries (hereafter respondent). Respondent is an accrual-basis taxpayer whose fiscal year is the calendar year. Beginning in 1972, it became a self-insurer with regard to its employee medical care plan. To receive medical payment reimbursements, employees must submit claims forms to employee benefits personnel, who verify eligibility and forward worthy claims to the plan’s administrators, whose claims processors review the claims and approve covered expenses for payment. To account for the delay between the provision of medical services and the payment of claims, respondent established reserve accounts reflecting its liability for medical care received, but still not paid for, as of December 31, 1972. On its amended 1972 tax return, respondent sought a refund based on its claimed deduction of its reserve as an accrued expense. The Internal Revenue Service disallowed the deduction, but the Claims Court sustained it, holding that "all events" which determined the fact of respondent’s liability had taken place when its employees received covered services, and that the amount of liability could be determined with reasonable accuracy. The Court of Appeals affirmed.

Held: Where the filing of claims is a condition precedent to liability, an accrual-basis taxpayer providing medical benefits to its employees cannot deduct at the close of the taxable year an estimate of its obligation to pay for medical care obtained by employees or their qualified dependents during the final quarter of the year, claims for which have not been reported to the employer. Pp. 242-247.

(a) The proposed deduction fails the "all events" test, because it depends on a mere estimate of respondent’s liability based on events that had not occurred before the close of the 1972 taxable year. The last event necessary to fix respondent’s liability was not the receipt of medical care by covered individuals, but the filing of properly documented claims forms. Such filing is not a mere technicality, nor is the possibility that some employees might not file claims after receiving services "extremely remote and speculative." Pp. 242-245.

(b) Respondent has not demonstrated that its liability as to any medical care claims was firmly established as of the close of the 1972 taxable year. Although the parties stipulated that respondent had not received claims for all services rendered during the year by the year’s end, and that some claims received had not been processed at that time, respondent failed to show what portion of the claims had been filed by the end of the year, or even that it knew of specific claims that had been filed, but not yet processed. The fact that respondent may have been able to make a reasonably accurate actuarial estimate of how many claims would be filed for the last quarter of 1972 cannot justify a deduction. If the "all events" test permitted such a deduction, Congress would not have retained 26 U.S.C. § 832(b)(5), which allows insurance companies to deduct additions to reserves for "incurred but not reported" claims. Pp. 245-247.

773 F.2d 1224, reversed.

MARSHALL, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and BRENNAN, WHITE, POWELL, and SCALIA, JJ., joined. O’CONNOR, J., filed a dissenting opinion, in which BLACKMUN and STEVENS, JJ., joined, post, p. 247.