Auto manufacturer may not deduct estimated future warranty costs.

• Author: Weinberger, Mark

The Tax Court ruled that an automobile manufacturer did not satisfy the first prong of the all-events test for its warranty expenses on the sale of vehicles to dealers. Instead, based on the manufacturer's obligation, the liability is fixed no sooner than when a claim is filed by either a dealer or a retail customer (Chrysler Corp., TC Memo 2000-238).

Chrysler deducted its warranty expenses in 1984 and 1985, arguing that the last event necessary to establish its warranty liability was the sale of a vehicle to a dealer. The IRS disallowed the deductions. Chrysler vehicles are covered by written warranties and by implied warranty provisions mandated by Federal and state statutes. Pursuant to separate agreements, Chrysler dealers must correct conditions covered by Chrysler's warranties and submit claims to Chrysler after completing the repairs.

Chrysler relied primarily on Hughes Properties, 476 US 593 (1986), in which a Nevada casino was required by state statute to pay out as jackpots a certain percentage of the amounts gambled in progressive slot machines and to keep on hand a cash reserve sufficient to pay the guaranteed jackpots. The Supreme Court found that the all-events test was satisfied and the casino was entitled to a deduction for the expense. The Court reasoned that the state statute made the amount shown on payout indicators incapable of reduction. Thus, the event-creating liability was the last play of the machine before the end of the fiscal year; an event that occurred during the tax year.

Chrysler relied on Hughes for the proposition that its statutory liability satisfied the first prong of the all-events test; namely, all events had occurred that establish liability. The Service, however, cited General Dynamics Corp., 481 US 239 (1987)...