## Facts

- Ford Motor Company, an accrual-method taxpayer, entered into about 20 structured settlements in 1980 to resolve personal injury and wrongful-death tort claims.
- The settlements required periodic payments over long terms; most extended 40 years or more, with one lasting up to 58 years.
- Settlements included: payments for a fixed term, for life, or for the longer of a fixed term or life.
- Ford bought single-premium annuity contracts from insurers to fund the payment streams; the annuities were designed to match the settlement payment schedules.
- The annuities did not discharge Ford’s liability; Ford remained obligated to claimants if an insurer defaulted.
- The annuity contracts cost about $4.42 million, and the parties stipulated the present value of Ford’s deferred payment obligations did not exceed the annuity cost.
- On its 1980 return, Ford deducted about $10.64 million by accruing undiscounted future settlement payments (using life expectancies where relevant) and also reported annuity receipts due in 1980 as income.
- The Commissioner determined Ford’s approach did not clearly reflect income under IRC § 446(b), limited Ford’s 1980 deduction to the annuity cost (or an amount not exceeding it), and excluded the corresponding annuity income Ford had reported.
- The adjustment affected a net operating loss carryback computation, producing a deficiency; the Tax Court upheld the Commissioner, and Ford appealed.

## Issues

1. Whether the Commissioner abused discretion under IRC § 446(b) by rejecting Ford’s accrual method for structured settlement liabilities as not clearly reflecting income and by limiting the 1980 deduction to the cost of the annuity contracts.
2. Whether satisfaction of the accrual “all events” test under IRC § 461 precludes the Commissioner from requiring a different method under § 446(b) to clearly reflect income.

## Decision

- The Sixth Circuit affirmed the Tax Court.
- The court held the Commissioner did not abuse discretion under § 446(b) in concluding Ford’s deduction of undiscounted, long-term payment obligations distorted income.
- The court approved limiting Ford’s 1980 deduction to the annuity cost (given the stipulated present-value relationship) and excluding the associated annuity income to avoid mismatched timing.

## Legal Principles

- IRC § 446(b) grants the Commissioner broad authority to require a method of accounting that clearly reflects income when the taxpayer’s method does not, subject to abuse-of-discretion review.
- Meeting the § 461 all-events test for accruing a liability does not, by itself, establish that the resulting method clearly reflects income; the clear-reflection standard can override mechanical accrual outcomes.
- Deducting the undiscounted face amount of very long-term payment obligations in the year of settlement can materially distort income by ignoring time value and economic cost measured on a present-value basis.
- Where a funding transaction provides a reliable measure of economic burden and present value does not exceed that measure, annuity cost may serve as a reasonable proxy for the deductible amount in the settlement year.
- The Commissioner may adjust both deductions and related inclusions to prevent mismatched timing and double counting when changing a taxpayer’s method.

## Conclusion

The Sixth Circuit upheld the IRS’s use of § 446(b) to reject Ford’s immediate deduction of undiscounted structured-settlement obligations and to substitute a method that limited the settlement-year deduction to annuity cost, on the ground that the substitute method better reflected income and the Commissioner’s determination was not plainly arbitrary.


Ford Motor Co. v. Commissioner, 71 F.3d 209 (6th Cir. 1995)