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

Rule:

26 U.S.C.S. § 446 provides the general rule governing use of methods of accounting by taxpayers. Section 446(b) provides that, if the method of accounting used by the taxpayer to compute income does not clearly reflect income, "the computation of taxable income shall be made under such method as, in the opinion of the secretary or his delegate, does clearly reflect income." § 446(b). The commissioner has broad discretion under § 446(b) to determine whether a particular method of accounting clearly reflects income. Since the commissioner has "much latitude for discretion," his interpretation of the statute's clear-reflection standard "should not be interfered with unless clearly unlawful."

Facts:

Petitioner Ford Motor Company ("Ford") purchased annuities to fund a structured settlement for tort obligations over several decades. Using the accrual method of accounting, Ford claimed a deduction totaling the annuity payout that it carried back to 1970 and reported the annuity income. Respondent Commissioner of Internal Revenue determined that this method did not clearly reflect income under 26 U.S.C.S. § 446(b), disallowed deductions in excess of the cost of the annuities, and excluded the annuity income.

Issue:

Did the Commissioner abuse her discretion in determining that Ford’s method of accounting for its structured settlements was not a clear reflection of income under 26 U.S.C. § 446(b) and in ordering Ford to limit its deduction in 1980 to the cost of the annuity contracts it purchased to fund the settlements?

Answer:

No.

Conclusion:

The court affirmed, finding that although the accrual of deductions satisfied the all events test, 26 U.S.C.S. § 461(h) did not preclude the application of the clear reflection standard of § 446(b). Ford’s method of accounting did not clearly reflect income because the tax benefit from allowing a one-time deduction for the full amount of liability could have funded the full amounts due in future years and left Ford with a profit. The method of accounting that the Commissioner imposed was appropriate because her discretion to impose an alternate method of accounting under § 446(b) was not limited to methods that petitioner could have adopted on its own.