UNITED STATES OF AMERICA, PETITIONER V. GENERAL DYNAMICS CORPORATION, ET AL. No. 85-1385 In the Supreme Court of the United States October Term, 1985 Petition for a Writ of Certiorari to the United States Court of Appeals for the Federal Circuit The Solicitor General, on behalf of the United States, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Federal Circuit in this case. PARTIES TO THE PROCEEDING In addition to the parties named in the caption, Datagraphix, Inc., Material Service Corporation, Marblehead Lime Corporation, and General Dynamics Land Systems, Inc. (formerly Stromberg-Carlson Corporation), are respondents. Each is a wholly-owned subsidiary of General Dynamics Corporation. TABLE OF CONTENTS Parties to the proceeding Opinions below Jurisdiction Statutes involved Question Presented Statement Reasons for granting the petition Conclusion Appendix A Appendix B Appendix C Appendix D Appendix E OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-5a) is reported at 773 F.2d 1224. The opinion of the Claims Court (App. infra, 6a-18a) is reported at 6 Cl. Ct. 250. JURISDICTION The judgment of the court of appeals (App., infra, 20a), was entered on September 19, 1985. On December 9, 1985, the Chief Justice extended the time within which to petition for a writ of certiorari to and including February 16, 1986 (a Sunday preceding a federal legal holiday). The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTES INVOLVED The relevant portions of Sections 162, 446 and 461 of the Internal Revenue Code of 1954 (26 U.S.C.), and of Sections 1.446-1 and 1.461-1 of the Treasury Regulations on Income Tax (26 C.F.R.), are set out in a statutory appendix (App., infra, 21a-26a). QUESTION PRESENTED Whether a taxpayer using the accrual method of tax accounting is entitled to deduct, as a fixed liability at the close of its taxable year, an addition to a reserve for future expenses expected to be paid under an employee medical reimbursement plan, where the addition is based on the taxpayer's estimate of its liability to employees who were assumed to have received medical care during the year, but who had not submitted claims for payment, or whose claims for payment had been submitted but not approved, before the close of the taxable year. STATEMENT 1. For many years respondent General Dynamics Corporation and its subsidiaries have been required by collective bargaining contracts to maintain health insurance coverage for their employees. Under these health plans, employees pay the first $100 of covered charges (generally called "the deductible") before becoming eligible for benefits. After that, employees generally are entitled to reimbursement for 80% of the covered medical costs that they or their dependents incur (C.A. App. 64). Certain items -- such as expenses related to pregnancy and childbirth, the costs of footcare and eyeglasses, the costs of "check-up examinations and tests not reasonably necessary to medical treatment" -- are not covered by the plans (id. at 54, 56). In the case of otherwise-covered items, employees are not entitled to reimbursement if the treatment is for work-related injuries, if the treatment is furnished by an unapproved practitioner, if the expenses are incurred within 30 days of an employee's entry into the plan, or if the expenses are attributable to certain pre-existing conditions (id. at 54, 57, 61-62; PX 47, at 41-48, 51-52). The plans specify a maximum amount allowable per illness, a maximum amount allowable for each particular treatment or procedure, and a daily limit on hospital charges (C.A. App. 48-50, 55). The plans also specify that reimbursement will not be made for expenses in excess of the provider's usual charge for a particular treatment or procedure, or in excess of a stated percentage (generally 85% or 90%) of the customary charge prevailing in the neighborhood (id. at 56; PX 47, at 33-36). To be entitled to reimbursement under respondent's health plans, a covered employee must submit a claim for benefits on a standard form (App., infra, 7a). The claim must be accompanied by itemized bills evidencing the amount paid and specifying the diagnosis and treatment given (id. at 7a-8a; C.A. App. 58). Respondent has no obligation to make any payment unless and until an employee has submitted a properly-documented claim for benefits and the claim has been determined to qualify for payment under the terms of the plans. 2. Prior to October 1, 1972, respondent supplied the health benefits outlined above by purchasing group medical insurance from two outside carriers, Aetna Life Insurance Company and Prudential Insurance Company. Insurance companies are generally required by state law to maintain certain reserves with respect to the insurance coverage that they provide. In the case of the medical insurance coverage that Aetna and Prudential provided to respondent's employees, both companies prior to October 1, 1972, maintained reserves for health claims that they estimated (1) had arisen, but had not yet been reported to them, or (2) had been reported to them, but had not yet been processed or approved for payment (App., infra, 8a). These reserves represented a statistical estimate, based on each carrier's past experience, of the amount that it would ultimately have to pay with respect to such actual or potential claims. Reserves of this sort are usually called "incurred but not reported," or "IBNR," reserves (ibid.). Under the special tax provisions applicable to insurance companies, an insurance company, unlike other taxpayers, is generally permitted to deduct additions to reserves (including IBNR reserves) that are required by state law. See I.R.C. Sections 807 (life insurance companies), 832(b)(5) (casualty insurance companies). On October 1, 1972, respondent became a self-insurer of its health care plans. Although respondent thus ceased paying premiums to Aetna and Prudential, those companies continued to administer the plans for a fee under service agreements (App., infra, 7a). This shift to self-insurance entailed no change in the medical benefits provided to respondent's employees; from their perspective, the only difference was that their health-benefits checks thence-forth were drawn on a different bank. Respondent's shift to self-insurance likewise entailed no change in the claims-processing procedure or in the personnel responsible for implementing it; employees' claims continued to be screened in the first instance by the claims department at respondent's plants, and then to be forwarded to the insurance company for evaluation and approval (ibid.). On the date respondent became a self-insurer, it agreed to pay all health claims that Aetna and Prudential had previously reserved against. On the same day, respondent took an amount equal to the aggregate IBNR reserves that Aetna and Prudential had previously maintained for those claims, and set that amount up as a liability on its own books. On December 31, 1972, using statistics supplied by those companies, respondent calculated an estimate of its liability to employees who were assumed to have received medical care during the last three months of 1972, but who had not submitted claims, or whose claims had been submitted but not approved, as of that date. The amount thus calculated was added to the beginning IBNR reserve balance that respondent had inherited from the insurance companies. Respondent then calculated the amount that it had actually paid out on approved claims during the final quarter of 1972. That amount was subtracted from the reserve balance. See App., infra, 8a-9a; C.A. App. 27-33. These calculations produced a year-end IBNR reserve balance in the amount of $5,575,289, representing respondent's estimate of its anticipated liability to pay benefits on claims arising from pre-1973 medical treatment. App., infra, 10a; C.A. App. 34-35. During 1973 and 1974, respondent actually paid out $4,583,893 in benefits on claims arising from pre-1973 medical treatment (App., infra, 16a). This sum was approximately $1 million (or 17.8%) less than the amount that respondent had reserved to pay such claims (ibid.). It has been the experience of Aetna and Prudential that about 90% of the amounts for which respondent's employees claim reimbursement are actually approved for payment (id. at 12a). As to the balance, the claims are rejected in whole or in part because the expenses for which reimbursement is sought are not covered by the health plans, because a specified maximum charge has been exceeded, because the treatment is not deemed medically necessary, or because the employee's expenditure otherwise fails to qualify for reimbursement under the terms of respondent's plans. 3. Respondent uses the accrual method of accounting for federal tax purposes. On its consolidated federal income tax return for calendar year 1972, respondent originally did not deduct any portion of its IBNR reserve in computing its tax (C.A. App. 34). In 1977, however, after the IRS had commenced an audit of that return, respondent filed an amended return for 1972, claiming that it was entitled to a deduction under Section 162 of the Code /1/ in the amount of $5,575,289 -- the 1972 year-end balance of its IBNR reserve -- as an "ordinary and necessary (business) expense() paid or incurred during the taxable year." See C.A. App. 37-38. The Commissioner denied respondent's claim for refund. He noted that, under the accrual method of tax accounting, an expense may not be deducted until "all of the events have * * * occurred which fix the liability" (Treas. Reg. Section 1.461-1(a)(2)). The Commissioner determined that the events which would fix respondent's liability to pay for a particular employee's medical treatment would be that employee's submission of a properly-documented claim for reimbursement, and respondent's determination that the claim qualified for payment, in some future tax year. Until those events occurred, the Commissioner concluded, respondent's obligation to pay was contingent and hence gave rise to no deductible expense. Following the denial of its administrative claim for refund, respondent filed this refund suit in the Claims Court. That court ruled for respondent (App., infra, 6a-18a). It held that the last event necessary to fix respondent's liability to reimburse its employees occurred "when a qualified employee or dependent receive(d) covered medical services" (id. at 11a, 13a). In the court's view, an employee's submission of a claim for benefits, and respondent's evaluation of the claim with a view to determining whether or not it qualified for payment, constituted mere "clerical," "administrative," or "ministerial" steps that were not "condition(s) precedent to establishing the fact of liability" (id. at 12a). The court held, moreover, that respondent, in order to establish the fact of its liability, was not required to demonstrate "any specific liability to particular employees who received treatment" (id. at 9a). Rather, it was sufficient for respondent to "estimate (its) aggregate liability" to its employees as a group, basing its estimate on a statistical probability that a certain quantum of covered medical services had been rendered to covered recipients (ibid.). The court noted that respondent's method of computing its IBNR reserve "reflected accepted insurance company practice" and that "insurance companies can and do deduct such reserves" (ibid.). The court concluded that respondent was entitled to deduct the entire 1972 year-end balance of its IBNR reserve as a salary expense "incurred during the taxable year" (I.R.C. Section 162(a)). The Federal Circuit affirmed (App., infra, 1a-5a). It stated that the issues had been "thoroughly treated in the trial court's opinion" and that the only question "which (it) need(ed) to address on appeal" was whether the decision below was contrary to Court of Claims precedent (id. at 1a-2a). The Federal Circuit answered that question in the negative and proceeded to "affirm * * * on the basis of the Claims Court opinion" (id. at 5a). REASONS FOR GRANTING THE PETITION This case presents an important question of federal tax law. The decision below is squarely at odds with fundamental principles that this Court has enunciated to govern accrual of deductions under the "all events" test of tax accounting, and it conflicts with the decisions of other courts of appeals that have applied those principles. The decision below produces an irrational result: by permitting respondent to take a current tax deduction for estimated liabilities based solely on extrapolations from past experience, that decision would permit the deduction of expenses that respondent may never incur at all. The question presented here is related to, but has considerably broader implications than, the question now pending before this Court in United States v. Hughes Properties, Inc., No. 85-554, also on certiorari to the Federal Circuit. Given the prevalance of employer-sponsored medical reimbursement plans, the revenue impact of the decision below, rendered by a court of nationwide jurisdiction, is substantial. Review by this Court is therefore appropriate. 1.a. Section 162(a) of the Code allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." A taxpayer who uses the "case receipts and disbursements method" of accounting (I.R.C. Section 446(c)(1)) is entitled to deduct business expenses only in the year in which they are paid (Treas. Reg. Sections 1.446-1(c)(1)(i), 1.461-1(a)(1)). A taxpayer who uses the "accrual method" of accounting (I.R.C. Section 446(c)(2)), by contrast, is entitled to deduct expenses in the year in which they are "incurred," regardless of when they are actually paid (I.R.C. Section 162(a); Treas. Reg. Section 1.461-1(a)(2)). For almost sixty years, the standard for determining when an item of expense is to be regarded as "incurred," and hence as being properly deductible for federal tax purposes, has been the "all events' test. First enunciated by this Court in United States v. Anderson, 269 U.S. 422, 424 (1926), the test was subsequently incorporated in the Treasury Regulations. It has two elements, both of which must be satisfied before accrual of an expense is proper. First, "all the events (must) have occurred which establish the fact of the liability giving rise to (the) deduction" (Treas. Reg. Section 1.446-1(c)(1)(ii)). Second, the amount of the deduction must be able to "be determined with reasonable accuracy" (ibid.). While the second part of the test permits a degree of computational flexibility, the Regulations emphasize that the first part of the test is absolute: "no accrual shall be made in any case (unless) all of the events have * * * occurred which fix the liability" (Treas. Reg. Section 1.461-1(a)(2)). In determinng whether a liability has become "fixed," and thus constitutes an "expense incurred during the taxable year" for federal tax purposes, this Court long ago made clear that "a liability does not accrue as long as it remains contingent." Brown v. Helvering, 291 U.S. 193, 200 (1934). "The prudent businessman," Justice Brandeis wrote for the Court, "often sets up reserves to cover contingent liabilities. But they are not allowable as deductions." Lucas v. American Code Co., 280 U.S. 445, 452 (1930) (footnote omitted). To be deductible for federal tax purposes, "the obligation to pay (must) ha(ve) become final and definite." Brown v. Helvering, 291 U.S. at 201. It must be "unconditional." Lucas v. North Texas Lumber Co., 281 U.S. 11, 13 (1930). It must not be "contested by the taxpayer." Dixie Pine Co. v. Commissioner, 320 U.S. 516, 519 (1944). "(T)he tax law requires," in short, "that a deduction be deferred until 'all the events' have occurred that will make it fixed and certain." Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 543 (1979) (quoting United States v. Anderson, 269 U.S. at 441). b. Contrary to the Claims Court's statement (App., infra, 13a), respondent's liability to reimburse its employees for their medical expenses was not "fixed and certain," was plainly not "unconditional" or "absolute," at the close of its 1972 taxable year. Under its collective bargaining contracts, respondent had no obligation to pay any medical benefits unless and until (1) an employee submitted a properly-documented claim for reimbursement and (2) respondent and its agents satisfied themselves that the claim qualified for payment under the terms of the health plans. The obligation represented by respondent's IBNR reserve was contingent at the close of its 1972 tax year because, as to every putative obligee, one or both of those conditions had not been met. In constructing its IBNR reserve, respondent made an assumption that an indefinite number of its employees had received medical services during 1972. As respondent conceded, however, many of those supposed recipients had not submitted any claim for reimbursement before the year ended. It was entirely possible, moreover, that some of those individuals would never submit a claim at all. Some might regard the medical expenses that they had incurred as too insignificant to warrant the trouble of seeking reimbursement. Some might not wish their employer's agents to know that they had undergone treatment for certain medical conditions. And some might fail to submit claims because of inadvertence or neglect. Since respondent had no obligation to pay medical benefits unless an employee filed a claim therefor, respondent's liability to these potential claimants was neither "unconditional" nor "absolute" at the close of its 1972 tax year. The balance of the employees in question had submitted claims to respondent, but their claims had not been determined to qualify for payment as of December 31, 1972. As to each claimant in this group, respondent reserved the right to contest its liability to make reimbursement on the grounds (inter alia) that the medical procedure was not covered by the health plans, that stipulated maximum charges had been exceeded, that the treatment was not medically necessary, or that the expenditure otherwise failed to qualify as a "covered medical expense." Although the trial court characterized the claims-processing procedure as "ministerial" and "routine" (App., infra, 12a), the court in fact found that only 90% of the amounts claimed by respondent's employees, on average, were actually approved (id. at 12a-13a). Since there thus existed a substantial possibility that any particular claim would be denied in whole or in part, respondent's liability to these claimants, like its liability to those employees who had not filed claims at all, was neither "unconditional" nor "absolute" on the last day of 1972. The trial court sought to avoid this conclusion by reasoning that respondent's liability became "fixed * * * upon occurrence of the insured event -- the receipt of covered services by the insureds" (App., infra, 15a). But this reasoning merely assumes what respondent was required to prove. Respondent made no attempt to ascertain whether any employee had in fact received medical services, much less that any employee had received covered medical services, before the close of its tax year. Obviously, respondent could not have shown that unless it had looked at its employees' claims to see if they qualified, something that respondent by hypothesis had not done. Rather, respondent simply assumed, based on projections from past experience, that a certain dollar volume of covered services had been rendered to an indeterminate number of unknown workers. Such an assumption is incompetent as a matter of law to "establish the fact of the liability" (Treas. Reg. Section 1.446-1(c)(1)(ii)) under this Court's decisions. Those decisions require that a deduction be deferred until all the events have occurred that fix the taxpayer's liability absolutely and unconditionally. An assumption that one has incurred an obligation in an estimatible amount cannot constitute proof of an "unconditional liability" if words are to retain their meaning. Respondent's liability was to pay medical benefits to individuals upon their satisfaction of certain conditions precedent. It has long been clear that a liability becomes "fixed" only when it is based on known facts respecting individual claimants; it cannot be based on projections of aggregate liability suggested by past experience. Indeed, the Federal Circuit's predecessor itself held that "(t)he individual items must represent fixed liabilities" and that the fact (as opposed to the amount) of liability "cannot be approximated or estimated." Union Pac. R. Co. v. United States, 524 F.2d 1343, 1351 (1975) (emphasis added; original quotation marks omitted). The burden of proving deductions is on the taxpayer (Helvering v. Taylor, 293 U.S. 507, 514-515 (1935)), and respondent simply failed to prove that, by this standard, it had become liable to any individual as of the date its tax year closed. Because respondent did not demonstrate the existence of a fixed and unconditional obligation as of the close of its taxable year, it failed to "establish the fact of (its) liability" (Treas. Reg. Section 1.446-1(c)(1)(ii)) as required by the first part of the "all events" test. Under these circumstances, it is immaterial whether the actuarial data supplied by respondent's plan administrators would have enabled it to satisfy the second part of the "all events" test, on the theory that the amount of its contingent liability, given those statistical projections, could "be determined with reasonable accuracy" (ibid.). As this Court's decisions make clear, the two parts of the "all events" test erect discrete and independent requirements, and both must be satisfied before a deduction is allowable. /2/ 2. In permitting respondent to take a current deduction for a contingent future expense, the decision below also conflicts in fundamental principle with this Court's decisions emphasizing the critical differences between tax and financial accounting. As we have pointed out at greater length in United States v. Hughes Properties, Inc., 85-554 U.S. Br. at 21.29, /3/ Congress has vested the Commissioner with "broad powers in determining whether accounting methods used by a taxpayer clearly reflect income" (Commissioner v. Hansen, 360 U.S. 446, 467 (1959)). Congress's decision in that respect owes in part to "the vastly different objectives that financial and tax accounting have." Thor Power Tool C., 439 U.S. at 542. "The primary goal of financial accounting is to provide useful information to management, shareholders, (and) creditors" and "to protect these parties from being misled" (ibid.). Financial accounting accordingly "has as its foundation the principle of conservatism, with its corollary that possible errors in measurement (should) be in the direction of understatement rather than overstatement of net income" (ibid.; original quotation marks omitted). "(t)he major responsibility of the Internal Revenue Service," by contrast, "is to protect the public fisc," so that "understatement of income is not destined to be its guiding light" (ibid.). Given this diversity, even contrariety, of objectives, to say that a taxpayer's accounting practice "'is in accord with generally accepted commercial accounting principles' * * * is not to hold that for income tax purposes it so clearly reflects income as to be binding on the Treasury." American Automobile Ass'n v. United States, 367 U.S. 687, 693 (1961) (footnote omitted). This Court's cases demonstrate that divergence between tax and financial accounting is especially common where, as here, "a taxpayer seeks a current deduction for estimated future expenses or losses" (Thor Power Tool Co., 439 U.S. at 541). Financial accounting rules, implementing the principle of conservatism, "typically require that a liability be accrued as soon as it can reasonably be estimated" (id. at 543 & n.20 (citing authorities)). Accruals of such anticipated liabilities are commonly made by establishing on the corporation's books a reserve account to cover amounts reasonably expected to be paid in the future. See, e.g., Commissioner v. Hansen, 360 U.S. at 448 (reserve to cover contingent liability in event of nonperformance of guarantee); Brown v. Helvering, 291 U.S. at 196-197 (reserve to cover expected liability in event of insurance policy cancellations); Lucas v. American Code Co., 280 U.S. at 447 (reserve to cover contingent liability on contested lawsuit). "Only a few reserves voluntarily established as a matter of conservative accounting," however, "are authorized by the Revenue Acts." Brown v. Helvering, 291 U.S. at 201-202. Among the reserves so authorized are those maintained by insurance companies. Congress for many years has provided that insurance companies generally may claim current tax deductions for specified additions to their reserves. See I.R.C. Sections 807 (life insurance companies), 832(b)(5) (casualty insurance companies). Consistently with that statutory authorization, the insurance companies from which respondent bought insurance prior to October 1, 1972, presumably deducted their year-end additions to their IBNR reserves, and those deductions were presumably allowed. See App., infra, 8a. Respondent, however, is not an "insurance company," a term that is defined with great precision in the Code. See I.R.C. Sections 816, 831. Respondent had no license, simply by electing to become a self-insurer, and by establishing on its books the same IBNR reserve previously used by Prudential and Aetna, to claim a deduction to which insurance companies alone are entitled. Contrary to the Claims Court's reasoning, therefore, it is irrelevant that respondent's method of computing its IBNR reserve "reflected accepted insurance company practice" and that "insurance companies can and do deduct such reserves" (App., infra, 9a). The propriety of respondent's deduction must be judged, not by principles applicable to insurance companies, but by the "all events" test applicable to taxpayers generally. That test "is designed to assure that taxpayers will not obtain deductions for expenditures that might never occur," and it thus "seeks certainty of liability rather than probability." World Airways, Inc. v. Commissioner, 62 T.C. 786, 805 (1974), aff'd, 564 F.2d 886 (9th Cir. 1977) (citing Brown v. Helvering, 291 U.S. at 201)). The courts below ignored these precepts in sustaining respondent's deduction. There was surely a probability that many of respondent's employees who had visited a doctor or hospital during 1972 would subsequently file claims for reimbursement. And there was likewise a probability -- apparently in the range of 90% -- that those claims, if submitted, would be determined to qualify for payment. Thus, "the principle of conservatism" (Thor Power Tool Co., 439 U.S. at 542) may have required respondent to set up a reserve for those items at once and show them as a liability on its books. "(B)ut the accountant's conservatism cannot bind the Commissioner in his efforts to collect taxes" (id. at 543). Although "estimates, probabilities, and reasonable certainties * * * may be useful, even essential, in giving shareholders and creditors an accurate picture of a firm's overall financial health," the tax law, "with its mandate to preserve the revenue, can give no quarter to uncertainty" (ibid.). The tax law requires that a taxpayer establish his liability as an unconditional fact, and respondent failed to do so. As this Court noted in American Automobile Ass'n, 367 U.S. at 694-697, Congress once adopted, albeit only briefly, provisions that would have permitted taxpayers to deduct anticipated expenses by a reserve mechanism identical to that used by respondent. As originally enacted in 1954, Section 462 of the Code allowed a deduction for "a reasonable addition to (a) reserve for estimated expenses," with "estimated expenses" being defined to include deductions "attributable to the income of the taxable year or prior taxable years." Internal Revenue Code of 1954, ch. 736, Section 462(a) and (d)(1)(B), 68A Stat. 158-159. Section 462 was designed to bring "(t)ax accounting more nearly in line with accepted business accounting * * * by allowing reserves to be established for known future expenses." S. Rep. 372, 84th Cong., 1st Sess. 3 (1955). Congress explained that Section 462 would allow taxpayers to deduct estimated amounts of "certain liabilities for self-insured injury and damage claims," precisely the types of claims at issue here. See H.R. Rep. 1337, 83d Cong., 2d Sess. A163 (1954); S. Rep. 1622, 83d Cong., 2d Sess. 63, 305-307 (1954). The change brought about by Section 462 was short-lived. Congress repealed that provision retroactively less than one year later, prompted by warnings from the Treasury Department "that the proposed endorsement of such (methods of) accounting would have a disastrous impact on the Government's revenue." American Automobile Ass'n, 367 U.S. at 695. The taxpayer in American Automobile Ass'n contended that Congress's retroactive repeal of this provision should not be interpreted to preclude us of the reserve method of tax accounting that it employed, but the Court held that this contention "'varnish(ed) nonsense with the charm of sound'" (367 U.S. at 695). "(T)he cold fact," the Court said, "is that (Congress) repealed the only law incontestably permitting the practice upon which the (tax-payer) depends" (ibid.). Congress thus has specifically considered and, upon reconsideration, rescinded a provision that would have achieved the very result that the court of appeals here adopted. That court had no license, by misapplying the "all events" test, to resurrect the rule that Congress deliberately discarded. 3. The decision below also conflicts, either directly or in fundamental principle, with numerous appellate decisions that have denied deductions in circumstances substantially similar to those here. It often happens that a taxpayer is under a present obligation -- be it statutory, regulatory, or contractual -- to make specified future payments upon the happening of specified future events. Relying on decisions like Brown v. Helvering, supra, the lower courts have held that such generalized and imcomplete obligations cannot justify current tax deductions under the "all events" test, correctly reasoning that such liabilities remain contingent until the requisite future events have transpired. In Trinity Construction Co. v. United States, 424 F.2d 302 (5th Cir. 1970), for example, an employer had a contractual obligation to pay future premiums on policies insuring the lives of key employees, and it sought a current deduction for the premium payments expected to be made over the contract term. The Fifth Circuit denied a deduction; it noted that the employer's liability was contingent on the employees' being alive when the premiums were due, and it held that an expense may be deducted "only in the taxable year when the obligation to pay it is unconditionally fixed" (424 F.2d at 305). In Bennett Paper Corp. v. Commissioner, 699 F.2d 450 (8th Cir. 1983), an employer had a contractual obligation to make future payments to a profit-sharing plan on account of employees' past services, provided that the individuals were still employed when the payments were due. The Eighth Circuit denied a current deduction; it noted that "the forfeiture provision made the * * * liability a contingent liability," and it held that a "liability is not fixed until all the conditions for payment are met" (699 F.2d at 453). In World Airways, Inc. v. Commissioner, supra, an airline had a contractual obligation to make future payments for statutorily-required engine overhauls, and it sought a current deduction for amounts expected to be paid over the contract term. The Tax Court denied a deduction; it noted that the taxpayer "was under no obligation to make any payment unless an overhaul was actually performed," and it held that an expense is not deductible unless the taxpayer's liability is "absolutely fixed in the year of accrual" (62 T.C. at 802, 804). The rationale of these cases shows the error of the holding below. Respondent had a contractual obligation under its collective bargaining agreements to reimburse employees for their medical expenses upon their satisfaction of certain conditions. The employees were required to submit a claim for benefits; they were required to document their claim with itemized bills; and they were required to satisfy respondent that the expenses they had incurred qualified for reimbursement under the terms of the health plans. Respondent had no obligation to make a payment to anyone until those conditions had been met, and, in the case of the amounts reflected in respondent's IBNR reserve, one or more of those conditions had not been met as of December 31, 1972. 4. The question presented here is of great importance to the administration of the revenue laws. The Internal Revenue Service advised that there are currently pending administratively 57 cases that involved the deductibility of IBNR reserves by corporations having self-insured medical reimbursement plans. Approximately $113 million in taxes is involved in those cases alone. The importance of the question, moreover, is not limited to cases involving medical plans, but extends to cases involving any sort of self-insured liability, from an employer's liability under a workers' compensation statute to a shipper's liability under a contract of carriage. Indeed, in repealing Section 462 thirty years ago, Congress was motivated largely by a Treasury Department estimate that the use of reserve methods of accounting for tax purposes would produce a transitional revenue loss in excess of $1 billion. See American Automobile Assn, 367 U.S. at 697 n.12; H.R. Rep. 293, 84th Cong., 1st Sess. 3 (1955). That figure would doubtless be a good bit higher today. As we have noted, the question presented here is related to that now pending before the Court in United States v. Hughes Properties, Inc., No. 85-554, which also involves the proper timing of deductions under the "all events" test. The question there is whether a gambling casino using the accrual method of tax accounting is entitled to deduct, as a fixed liability at the close of its taxable year, the amounts registered on the "jackpot indicators" of its progressive slot machines, even though it has no obligation to pay such amounts unless and until the jackpots are won by its patrons, in some future year. Although the instant case raises a similar legal issue, it presents a question of substantially broader implications, involving as it does the ability of taxpayers to deduct mere estimates of liability based on projections from past experience. Given the prevalence of self-insurance plans among this country's major corporations, moreover, the factual setting of the instant case is far more typical of the problems that confront the Commissioner and taxpayers alike in this difficult area of the law. The Court's decision in Hughes Properties will not necessarily be dispositive of the outcome here, and we believe that this case warrants the Court's plenary review. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. CHARLES FRIED Solicitor General ROGER M. OLSEN Acting Assistant Attorney General ALBERT G. LAUBER, JR. Assistant to the Solicitor General DAVID ENGLISH CARMACK WILLIAM A. WHITLEDGE Attorneys FEBRUARY 1986 /1/ Unless otherwise noted, all statutory references are to the Internal Revenue Code of 1954 (26 U.S.C.), as amended (the Code or I.R.C.). /2/ We argued below that respondent's actuarial data in fact did not enable "the amount (of its liability to) be determined with reasonable accuracy" (Treas. Reg. Section 1.446-1(c)(1)(ii)) for purposes of the second part of the "all events" test, pointing out in this connection the $1 million differential between the reserve amount that respondent sought to deduct and the sums that it actually paid. See App., infra, 16a. Although we believe that the courts below erred in rejecting our argument (id. at 5a, 16a-17a), we are not presenting for review here the question of respondent's ability to satisfy the second part of the "all events" test. /3/ We have furnished a copy of that brief to respondent's counsel. Appendix