## Facts

- Chrysler, an accrual-method taxpayer, sold new vehicles to dealers with warranties shaped in part by state and federal law.
- For 1984 and 1985, Chrysler deducted large amounts of estimated future warranty expenses (approximately $567 million and $297 million), based on actuarial-style projections of expected warranty claims and costs.
- The Commissioner disallowed the deductions on the ground that Chrysler’s warranty liabilities were not incurred in the year of sale under the all-events test and, for these obligations, economic performance had not yet occurred.
- Chrysler had made certain foreign tax credit (FTC) elections in earlier years and later sought to change or revoke some of those elections to reduce tax.
- The Commissioner determined that a ten-year limitations period barred the attempted FTC election changes.
- Chrysler incurred costs in redeeming shares associated with its employee stock ownership plan (ESOP) and claimed current deductions for those costs.
- The Commissioner treated the ESOP redemption costs as capital expenditures.
- The Tax Court granted partial summary judgment to the Commissioner on the warranty, FTC, and ESOP issues; Chrysler appealed.

## Issues

1. Whether Chrysler could deduct estimated future warranty expenses in the year it sold warranted vehicles under the accrual method’s all-events test (including economic performance).
2. Whether a ten-year statutory limitations period barred Chrysler from changing certain prior FTC elections.
3. Whether ESOP share redemption costs were currently deductible business expenses or nondeductible capital expenditures.

## Decision

- The Sixth Circuit affirmed the Tax Court’s rulings for the Commissioner on all three issues.
- Chrysler could not deduct estimated warranty expenses in the year of sale because liability was not fixed at sale and economic performance had not yet occurred.
- Chrysler’s attempted changes to certain FTC elections were barred by the ten-year limitations period.
- Chrysler’s ESOP redemption costs were capital expenditures and therefore not currently deductible.

## Legal Principles

- Under the accrual method, a liability is incurred for federal tax purposes only when (1) all events establishing the fact of liability have occurred, (2) the amount can be determined with reasonable accuracy, and (3) economic performance has occurred.
- A general obligation to honor warranties does not fix liability for estimated warranty costs at the time of vehicle sale when additional contingent events (e.g., defects, presentation of a claim, and performance of repairs) must occur before payment is required.
- For liabilities requiring the taxpayer to provide services or property, economic performance generally occurs as the services or property are actually provided, not when the obligation is created.
- Statutory deadlines governing FTC elections and changes are enforced according to their terms; attempts to alter elections outside the ten-year period are untimely.
- Costs connected to transactions affecting a corporation’s equity structure, including share redemptions producing long-term benefits, are capital in nature and must be capitalized rather than deducted currently.

## Conclusion

The court held that Chrysler could not accelerate deductions for projected warranty costs at the time of sale, could not reopen specified foreign tax credit elections after the ten-year period, and had to capitalize ESOP redemption costs as capital expenditures.


Chrysler Corp. v. Comm’r, 436 F.3d 644 (6th Cir. 2006)