Tax Court expansively interprets clear-reflection-of-income standard.

• Author: Schleicher, Deborah M.

A recent opinion reviewed by the full Tax Court upheld an IRS determination that a taxpayer's accounting method did not clearly reflect income (Ford Motor Co., 102 TC No. 6 (1994)). The court also found that the Service did not abuse its discretion in making this determination, even though the taxpayer's method was otherwise permitted under the Code and regulations. The issue was whether Ford could deduct the full amount of future payments under 1980 settlement agreements for tort liabilities in the tax year the agreements were executed. The basis for the deduction was that the all-events test (before enactment of Sec. 461(h) in 1984) had been satisfied. The Tax Court held that the deduction should be limited to the amount Ford paid to purchase single-premium annuity contracts to fund the liabilities. In reaching this decision, the Tax Court is apparently requiring an accrual-method taxpayer to use time-value concepts to measure accrual-method deductions for pre-July 18, 1984 transactions.

Facts

In 1980, Ford executed 20 settlement agreements with tort claimants under which it was obligated to make a series of payments over various periods, the longest being 58 years. It funded the series of payments with single-premium annuity contracts. The present value of the settlement payments to be made did not exceed the amounts Ford paid for the annuity contracts. On its 1980 return, Ford claimed a deduction for the full (i.e., nondiscounted) amount of all payments to be made under the settlement agreements executed in 1980. The IRS disallowed deductions beyond the cost of the annuity contracts, under the theory that Ford's method of accounting for the settlement amounts did not clearly reflect income.

All-events test

For pre-July 18, 1984 transactions, Regs. Sec. 1.461-1(a)(2) provides that an expense is deductible by an accrual-method taxpayer for the tax year in which (1) all the events have occurred to establish the fact of the liability and (2) the amount of the liability can be determined with reasonable accuracy. The Tax Court assumed the all-events test was satisfied for the payments to be made under the settlement agreements. Ford argued that because deducting the full amount of the future payments under the agreements was a method of accounting authorized by...