Payments to settlement fund held deductible outside sec. 468B.

• Author: Powell, Rhonda S.
• Position: Brief Article

A recent appellate decision indicates that payments to a settlement fund may be deductible despite the fact that the liability remains contested. In Maxus Energy Corp., Fed. Cir., 7/29/94, the taxpayer was a defendant in a class action suit over injuries arising from exposure to Agent Orange. Pursuant to a settlement agreement, the taxpayer agreed to contribute funds to a court-administered settlement fund established by a Federal district court. The court first required the taxpayer to obtain an irrrevocable letter of credit sufficient to secure payment; the taxpayer accomplished this on July 2, 1984. The taxpayer then declined to opt out of the defendant class by the July 19, 1984 deadline for such action. Finally, on Jan. 7, 1985, the court required the taxpayer to transfer money to the settlement fund. The taxpayer accordingly transferred $23,339,417 to the fund on Jan. 14, 1985.

The court agreed with the Court of Federal Claims that no deduction was available in 1984, when the letter of credit was executed. Former Sec. 461(f) stated that a deduction was available when, but for the fact that an asserted liability was contested, the "all events" test was met. This condition would have been met when the taxpayer's right to opt out of the defendant class expired on July 19, 1984; however, Sec. 461(h) had been enacted, and Sec. 461(f) amended, prior to that date...