## Facts

- General Dynamics, an accrual-basis taxpayer, became a self-insurer for employee medical benefits effective October 1, 1972, using private carriers only to administer claims.
- Plan participants had to submit claim forms; company personnel verified eligibility and forwarded claims to third-party administrators for processing and payment approval.
- By December 31, 1972, employees and dependents had received covered medical care for which many claims had not yet been filed.
- General Dynamics established reserve accounts estimating its liability for these incurred-but-not-reported medical expenses and deducted the reserve on an amended 1972 return as an accrued business expense under § 162(a).
- The IRS disallowed the deduction; the Claims Court and the Federal Circuit ruled for General Dynamics.

## Issues

1. Under the “all events” test for accrual accounting, may a self-insured employer deduct a year-end estimate of medical-benefit costs for services already rendered when employees have not yet filed the required claims?
2. Does a contractual requirement that employees file claims operate as a condition precedent that prevents the “fact of liability” from being fixed at year end?

## Decision

- The Supreme Court reversed and held for the United States.
- The Court ruled that General Dynamics could not deduct the year-end reserve for unfiled claims because the deduction failed the first prong of the all-events test.
- The Court concluded that the final event fixing liability was the filing of properly documented claim forms, not the receipt of medical services.
- The Court rejected the argument that claim filing was merely ministerial or that nonfiling was too unlikely to matter; until claims were filed, liability remained contingent.
- Dissent: Justice O’Connor (joined by Justices Blackmun and Stevens) would have treated liability as fixed when covered services were rendered, viewing claim submission as administrative.

## Legal Principles

- An accrual-basis taxpayer may deduct an expense only when (1) all events have occurred that determine the fact of liability and (2) the amount is determinable with reasonable accuracy.
- If a plan makes claim filing a condition precedent to payment, the fact of liability is not fixed until a proper claim is filed.
- Statistical or actuarial ability to estimate aggregate costs cannot substitute for the requirement that liability be legally fixed by the necessary events.
- Reserves reflecting contingent liabilities—obligations that may never arise because a required condition may not occur—are not deductible as accrued expenses.

## Conclusion

The Court held that a self-insured accrual-basis employer cannot deduct a year-end reserve for incurred-but-not-reported medical claims when the plan requires employees to file claims as a condition precedent to payment, because liability is not fixed under the all-events test until claims are filed.


United States v. Gen. Dynamics Corp., 481 U.S. 239 (1987)