Ford Motor Co. v. Commissioner

71 F.3d 209 (6th Cir. 1995)

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Nature of the Case

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Facts

P files its income taxes using the accrual method of accounting. In the years preceding 1980, some of P's cars and trucks were involved in automobile accidents, and in 1980, P entered into 20 structured settlement agreements in settlement of personal injury or accidental death claims with persons who were injured in the accidents and with survivors of persons who died as a result of the accidents. P agreed to make periodic payments of tort damages, yearly or monthly, in exchange for a release of all claims. All but three of the settlements provided for payments over a period of 40 years or more. P purchased single premium annuity contracts at a cost of $4,424,587. None of the settlement agreements released P from liability following the purchase of the annuity contract, and, in the event of a default on an annuity, P would be required to pay the remaining balance owed to the tort claimants. The parties stipulated that the present value of the deferred payments did not exceed the cost of the annuity contracts. For Type I settlements, P claimed the total amount of all periodic payments due; for the Type II settlements, it claimed the amounts it actually paid during 1980; and for the Type III settlements, it claimed the total amount of all payments due for the period certain portion of the settlement. The total deduction came to $10,636,994. P also reported the annuity income on its 1980 federal income tax return. P reported the 1980 structured settlements by expensing the cost of the annuity in the year of the settlement. D determined the method of accounting for its structured settlements did not clearly reflect income under §446(b) and disallowed the deductions in excess of the cost of the annuities purchased. Respondent also excluded from petitioner's income the amounts required to be reported as income from annuity contracts, which was $323,340 in 1980. D assessed taxes due as $3,300,151. P sued D in Tax Court. P claimed a deduction in 1980 of the full amount of all payments to be made under the structured settlements. That total was $24,477,699. The court upheld for D and the parties settled on $2,833,860. P appealed.