481 U.S. 239, 107 S. Ct. 1732, 95 L. Ed. 2d 226 (1987)
General Dynamics Corporation and several of its wholly owned subsidiaries are accrual-basis taxpayers whose fiscal year coincides with the calendar year.1 From 1962 until October 1, 1972, General Dynamics purchased group medical insurance for its employees and their qualified dependents from two private insurance carriers.2 Beginning in October 1972, General Dynamics became a self-insurer with regard to its medical care plans, paying claims out of its own funds while continuing to employ private carriers to administer the plans.3
To receive reimbursement of expenses for covered medical services, employees submit claim forms to employee benefits personnel who verify that the treated persons were eligible under the plan as of the time of treatment.4 Eligible claims are then forwarded to the plan's administrators.5 Claims processors review the claims and approve for payment those expenses that are covered under the plan.6
Because the processing of claims takes time and because employees do not always file their claims immediately, there is a delay between the provision of medical services and payment by General Dynamics.7 To account for this time lag, General Dynamics established reserve accounts to reflect its liability for medical care received but still not paid for as of December 31, 1972.8 It estimated the amount of those reserves with the assistance of its former insurance carriers.9
General Dynamics did not initially deduct any portion of this reserve in computing its tax for 1972.10 In 1977, after the Internal Revenue Service began an audit of its 1972 tax return, General Dynamics filed an amended return claiming it was entitled to deduct its reserve as an accrued expense and seeking a refund.11 The IRS disallowed the deduction, and General Dynamics sought relief in the Claims Court.12 The Claims Court sustained the deduction.13 The Court of Appeals for the Federal Circuit affirmed.14 The United States sought review of whether all the events necessary to fix liability had occurred, and the Supreme Court granted certiorari.15
Whether an accrual-basis taxpayer providing medical benefits to its employees may 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?16
Under the all events test embodied in Treas. Reg. § 1.461-1(a)(2), an expense is deductible for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy.17 Liability must be firmly established and may not be contingent or based on events that have not occurred by the close of the taxable year.18
No. The all events test is not satisfied because the filing of claims is necessary to fix the liability.19 A person covered by a plan could only obtain payment for medical services by filling out and submitting a health-expense-benefits claim form.20 Some covered individuals, through oversight, procrastination, confusion over the coverage provided, or fear of disclosure to the employer of the extent or nature of the services received, might not file claims for reimbursement to which they are plainly entitled.21 As of December 31, 1972, the taxpayer had not received all claims for medical treatment services rendered in 1972, and some claims had been filed for services rendered in 1972 that had not been processed.22
The taxpayer failed to demonstrate that any of the deducted reserve represented claims for which its liability was firmly established as of the close of 1972.23 A reserve based on the proposition that a particular set of events is likely to occur in the future may be an appropriate conservative accounting measure, but does not warrant a tax deduction.24
The taxpayer is not entitled to the deduction because all events necessary to establish liability had not occurred by the close of the taxable year.25
Related opinions on this issue
Joined by Justice Blackmun And Justice Stevens
Justice O’Connor, with whom Justice Blackmun and Justice Stevens join, dissented.26 This case calls for the Court to revisit the issue addressed only last Term in United States v. Hughes Properties, Inc., 476 U.S. 593 (1986).27 The taxpayer here is seeking to deduct the amounts reserved to pay for medical services that are determined to have been provided to employees in the taxable year.28 This applies whether or not the employees’ claims for benefits have been received.29 It is true, of course, that it was theoretically possible that some employees might not file claim forms.30
In her view, however, this speculative possibility of nonpayment differs not at all from the speculation in Hughes Properties that a jackpot might never be paid by a casino.31 The Claims Court found that the processing of the employees’ claims was routine and ministerial in nature.32 Even if the filing of a claim is a necessary precondition to liability as a matter of law, the failure to file a claim is at most a merely formal contingency, or one highly improbable under the known facts, that this Court has viewed as insufficient to preclude accrual and deductibility.33
The holding of the Court today unnecessarily burdens taxpayers by further expanding the difference between tax and business accounting methods without a compelling reason to do so.34