United States v. General Dynamics

481 U.S. 239 (1987)

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Nature of the Case

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Facts

P used the accrual method of accounting for federal tax purposes; its fiscal year was the same as the calendar year. Beginning in October 1972, P became a self-insurer with regard to its medical care plans. Instead of continuing to purchase insurance from outside carriers, it undertook to pay medical claims out of its own funds, while continuing to employ private carriers to administer the medical care plans. To receive reimbursement of expenses for covered medical services, P's employees submit claims forms to employee benefits personnel, who verify that the treated persons were eligible under the applicable plan as of the time of treatment. Eligible claims are then forwarded to the plan's administrators. Claims processors review the claims and approve for payment those expenses that are covered under the plan. There is a delay between the provision of medical services and payment by P. P established reserve accounts to reflect its liability for medical care received, but still not paid for, as of December 31, 1972. It estimated the amount of those reserves with the assistance of its former insurance carriers. P did not deduct any portion of this reserve in computing its tax for 1972. In 1977, P filed an amended return, claiming it was entitled to deduct its reserve as an accrued expense, and seeking a refund. D disallowed the deduction, and P sought relief in the Claims Court. The Claims Court sustained the deduction, holding that it satisfied the 'all events' test. The court of appeals agreed, and D appealed.