Chrysler Corporation v. Commissioner

436 F.3d 644 (2006)

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Chrysler Corporation v. Commissioner

United States Court of Appeals for the Sixth Circuit
436 F.3d 644 (2006)

JC

Facts

Chrysler Corporation (Chrysler) (plaintiff) filed suit due to an issue with its accrual-accounting-method tax returns. Chrysler included deductions of over $567 million and $297 million on its 1984 and 1985 federal income taxes, respectively, on the basis that Chrysler incurred those amounts as warranty expenses on automobiles sold to its dealers in those years. The sales occurred when the vehicle was delivered to the carrier for shipment to the dealer. No question arose that the initial events were all completed in the taxable years concerned. However, with a new vehicle warranty, which is generally mandated by relevant state and federal laws, the actual warranty claims and expenses had not been incurred. Chrysler used a consultant who provided the best possible information to estimate future claims and costs. However, the Commissioner of Internal Revenue (the commissioner) (defendant) argued that Chrysler could not deduct those amounts, as the warranty claims had not yet been made. Under the all-events test, the events must have occurred, establishing the fact of liability, and the amount of liability must be determinable with reasonable accuracy. Unfortunately, two contradictory Supreme Court cases contemplating these matters occurred. In the first, Hughes Properties, a casino required by state law to pay a percentage of the funds gambled as a jackpot, was allowed to claim the casino’s deductions because the last play of the year was the final event creating liability, thus satisfying the test. In the second case, General Dynamics, a company wrote off costs of its employee medical plan, but whereas the needs had arisen and treatment was obtained, the employees had not yet filed the reimbursement form. Therefore, the Court denied the company the deduction because the reimbursement forms had to be filed to fulfill the events establishing the fact of liability. The trial court ruled for the commissioner in this case, and Chrysler appealed.

Rule of Law

Issue

Holding and Reasoning (Norris, J.)

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