UNITED STATES OF AMERICA, PETITIONER V. GENERAL DYNAMICS
CORPORATION, ET AL.

   No. 85-1385

   In the Supreme Court of the United States

   October Term, 1986

   On Writ of Certiorari to the United States Court of Appeals for the
Federal Circuit

   Brief for the United States

                       PARTIES TO THE PROCEEDING

   In addition to the parties named in the caption, Datagraphix, Inc.,
Material Service Corporation, Marblehead Lime Corporation, and General
Dynamics Land Systems, Inc. (formerly Stromberg-Carlson Corporation),
are respondents.  Each is a wholly-owned subsidiary of General
Dynamics Corporation.

            TABLE OF CONTENTS
   Parties to the proceeding
   Opinions below
   Jurisdiction
   Statutes and regulations involved
   Question presented
   Statement
   Summary of argument
   Argument:
      A reserve established to cover the estimated cost
      of reimbursing employees for medical services assumed
      to have been rendered during the taxable year, where
      payment is contingent upon the filing and processing
      of qualified claims in future years, is not an
      expense "incurred during the taxable year" and
      hence cannot give rise to a current business-expense
      deduction for an accrual-basis taxpayer
      A. The amount of respondent's estimated future
          medical reimbursements is not an expense incurred
          during the taxable year, but rather is a reserve
          for future expenses that cannot be currently deducted
          because its use for that purpose has not been
          specifically authorized by Congress
      B. Respondent's attempt to deduct additions to its
          IBNR reserve fails the "all events" test
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. 1a-5a) is reported
at 773 F.2d 1224.  The opinion of the Claims Court (Pet. App. 6a-18a)
is reported at 6 Cl. Ct. 250.

                             JURISDICTION

   The judgment of the court of appeals (Pet. App. 20a) was entered on
September 19, 1985.  On December 9, 1985, the Chief Justice extended
the time within which to petition for a writ of certiorari to and
including February 16, 1986 (a Sunday preceding a federal legal
holiday).  The petition was filed on February 18, 1986, and was
granted on June 16, 1986 (J.A. 179).  The jurisdiction of this Court
rests on 28 U.S.C. 1254(1).

                   STATUTES AND REGULATIONS INVOLVED

   The relevant portions of Sections 162, 446, and 461 of the Internal
Revenue Code of 1954 (26 U.S.C. (& Supp. II)), and of Sections 1.446-1
and 1.461-1 of the Treasury Regulations on Income Tax (26 C.F.R.), are
set forth at Pet. App. 21a-26a.

                          QUESTION PRESENTED

   Whether a taxpayer using the accrual method of tax accounting is
entitled to deduct, as a fixed liability at the close of its taxable
year, an addition to a reserve for future expenses expected to be paid
under an employee medical reimbursement plan, where the addition is
based on the taxpayer's estimate of its liability to employees who
were assumed to have received medical care during the year, but who
had not submitted claims for payment, or whose claims for payment had
been submitted but not approved, before the close of the taxable year.

                               STATEMENT

   1. For many years respondent General Dynamics Corporation and its
subsidiaries have been required by collective bargaining contracts to
maintain medical benefit plans for their employees.  /1/ Under these
benefit plans, employees pay the first $100 of covered charges
(generally called "the deductible") before becoming eligible for
benefits.  After that, employees generally are entitled to
reimbursement for 80% of the covered medical costs that they or their
dependents incur (J.A. 64).  Certain items -- such as expenses related
to pregnancy and childbirth, the costs of foot-care and eyeglasses,
the costs of "checkup examinations and tests not reasonably necessary
to medical treatment" -- are not covered by the plans (J.A. 54-56).
In the case of otherwise-covered items, employees are not entitled to
reimbursement if the treatment is for work-related injuries, if the
treatment is furnished by an unapproved practitioner, if the expenses
are incurred within 30 days of an employee's entry into the plan, or
if the expenses are attributable to certain pre-existing conditions
(J.A. 55, 56-57, 61, 162-164).  The plans specify a maximum amount
allowable per illness, a maximum amount allowable for each particular
treatment or procedure, and a daily limit on hospital charges (J.A.
48-53, 63-77).  The plans also specify that reimbursement will not be
made for expenses in excess of the provider's usual charge for a
particular treatment or procedure, or in excess of the customary
charge prevailing in the neighborhood (J.A. 58, 160-161).

   In order to obtain reimbursement under respondent's health plans, a
covered employee must submit a claim for benefits on a standard form
(Pet. App. 7a;  J.A. 23).  The claim must be accompanied by itemized
bills evidencing the amount paid and specifying the diagnosis and
treatment given (Pet. App. 7a-8a;  J.A. 23).  Respondent has no
obligation to make any payment unless and until an employee has
submitted a properly-documented claim for benefits and the claim has
been determined to qualify for payment by respondent's claims
examiner.  See Pet. App. 7a-8a.

   2. Prior to October 1, 1972, respondent supplied the health
benefits outlined above by purchasing group medical insurance from two
outside carriers, Aetna Life Insurance Company and Prudential
Insurance Company.  Insurance companies are generally required by
state law to maintain certain "reserves" with respect to the insurance
coverage that they provide.  In the case of the medical insurance
coverage that Aetna and Prudential provided to respondent's employees,
both companies prior to October 1, 1972, maintained reserves for
health claims that they estimated (1) had arisen, but had not yet been
reported to them, or (2) had been reported to them, but had not been
processed or approved for payment (Pet. App. 8a).  These reserves
represented a statistical estimate, based on each carrier's past
experience, of the amount that it would ultimately have to pay with
respect to such actual or potential claims.  Reserves of this sort are
usually called "incurred but not reported," or "IBNR," reserves
(ibid.).  Under the special tax provisions applicable to insurance
companies, an insurance company, unlike other taxpayers, is generally
permitted to deduct additions to reserves (including IBNR reserves)
that are required by state law.  See I.R.C. Section 807 (life
insurance companies), Section 832(b)(5) (casualty insurance
companies).

   On October 1, 1972, respondent became "a self-insurer of its
medical care plan" (Pet. App. 2a, 7a).  In other words, rather than
purchasing insurance by the payment of premiums to outside carriers,
respondent accepted the responsibility to pay employee medical claims
out of its own funds.  Although respondent thus ceased paying
insurance premiums to Aetna and Prudential, those companies continued
to administer the plans for a fee under service agreements (Pet. App.
7a).  This shift to self-insurance entailed no change in the medical
benefits provided to respondent's employees.  From their perspective,
the only difference was that their health-benefits checks thenceforth
were drawn on a different bank and by a different payor.  Respondent's
shift to self-insurance likewise entailed no change in the
claims-processing procedure or in the personnel responsible for
implementing it.  Employees' claims continued to be screened in the
first instance by the claims department at respondent's plants and
then to be forwarded to the insurance company for evaluation and
approval (ibid.).

   In conjunction with its becoming a self-insurer, respondent agreed
to accept responsibility for all as-yet-unfiled or unpaid claims
arising out of medical services rendered before October 1, 1972.  On
that date, respondent took an amount equal to the aggregate IBNR
reserves that Aetna and Prudential had previously maintained for those
claims and set that amount up as a liability on its own books.  On
December 31, 1972, using statistics supplied by those companies,
respondent calculated an estimate of its liability to employees who
were assumed to have received medical care during the last three
months of 1972, but who had not submitted claims, or whose claims had
been submitted but not yet processed.  The amount thus calculated was
added to the beginning IBNR reserve balance that respondent had
inherited from the insurance companies.  Respondent then calculated
the amount that it had actually paid out on approved claims during the
final quarter of 1972.  That amount was subtracted from the reserve
balance.  See Pet. App. 8a-9a;  J.A. 27-33.  These calculations
(together with other minor adjustments) produced a year-end IBNR
reserve balance in the amount of $5,575,289, representing respondent's
estimate of its anticipated liability to pay benefits on claims
arising from pre-1973 medical treatment (Pet. App. 10a;  J.A. 33-34).

   During 1973 and 1974, respondent actually paid out $4,583,893 in
benefits on claims arising from pre-1973 medical treatment (Pet. App.
16a).  This sum was approximately $1 million (or 17.8%) less than the
amount that respondent had reserved to pay such claims (ibid.).  In
the courts below, respondent presented no evidence that would indicate
what portion either of its $5.5 million IBNR balance or of the $4.5
million actually paid represented medical treatment for which claims
had not been filed as of December 31, 1972, as opposed to treatment
for which claims had been filed but not yet processed.

   It has been the experience of Aetna and Prudential that about 90%
of the amounts for which respondent's employees claim reimbursement
are actually approved for payment (Pet. App. 12a).  As to the balance,
the claims are rejected in whole or in part because they fail to
qualify for reimbursement under the terms of the plans for one or more
reasons.  An expense would fail to qualify, for example, if the
medical treatment were not a "covered service," if the employee's
"deductible" had not been satisfied, if a specified maximum charge had
been exceeded, or if the treatment were not deemed "medically
necessary." See J.A. 48-57.

   3. Respondent uses the accrual method of accounting for federal tax
purposes.  On its consolidated federal income tax return for calendar
year 1972, respondent originally did not deduct any portion of its
IBNR reserve in computing its tax.  In 1977, however, after the IRS
had commenced an audit of that return, respondent filed an amended
return for 1972, claiming that it was entitled to deduct the 1972
year-end balance of its IBNR reserve ($5,575,289) as an ordinary and
necessary business expense incurred during that taxable year.  See
I.R.C. Section 162;  J.A. 36.

   The Commissioner denied respondent's claim for refund because the
deduction sought for the IBNR reserve failed to satisfy the so-called
"all events" test of tax accounting.  That test provides that, under
the accrual method of accounting, an expense may not be deducted until
"all the events have occurred which determine the fact of the
liability and the amount thereof can be determined with reasonable
accuracy" (Treas. Reg. Section 1.461-1(a)(2)).  The Commissioner
determined that the events that would fix respondent's liability to
pay for a particular employee's medical treatment would be that
employee's submission of a properly-documented claim for
reimbursement, and respondent's determination that the claim qualified
for payment, in some post-1972 tax year.  Until those events occurred,
the Commissioner concluded, respondent's obligation to pay was
contingent and hence did not give rise to a deductible expense during
the 1972 taxable year.

   4. Following the denial of its administrative claim for refund,
respondent filed this refund suit in the Claims Court, which ruled in
its favor (Pet. App. 6a-18a).  The court held that the last event
necessary to fix respondent's liability to reimburse its employees
occurs "when a qualified employee or dependent receives covered
medical services" (id. at 11a, 13a).  In the court's view, an
employee's submission of a claim for benefits and respondent's
evaluation of it with a view to determining whether or not it
qualifies for payment constitute mere "clerical," "administrative," or
"ministerial" steps that are not "condition(s) precedent to
establishing the fact of liability" (ibid.).  The court held,
moreover, that respondent in order to establish the fact of its
liability, need not demonstrate "any specific liability to particular
employees who received treatment" (id. at 9a).  Rather, it was
sufficient for respondent to "estimate (its) aggregate liability" to
its employees as a group, basing its estimate on a statistical
probability that a certain quantum of covered medical services had
been rendered to covered recipients (ibid.).  The court noted that
respondent's method of computing its IBNR reserve "reflected accepted
insurance company practice" and that "insurance companies can and do
deduct such reserves" (ibid.).  The court also ruled that, because
respondent ultimately paid out 82.2% of the amount reserved, its
estimate satisfied the "reasonable accuracy" prong of the "all events"
test (ibid.).  The court accordingly held that respondent was entitled
to deduct the entire 1972 year-end balance of its IBNR reserve as a
business expense "incurred during the taxable year" (I.R.C. Section
162(a)).

   The Federal Circuit affirmed (Pet. App. 1a-5a).  The court stated
that the issues had been "thoroughly treated in the trial court's
opinion" and that the only question that it "need(ed) to address on
appeal" was whether the decision below was contrary to Court of Claims
precedent (id. at 1a-2a).  The Federal Circuit answered that question
in the negative and proceeded to "affirm * * * on the basis of the
Claims Court opinion" (id. at 5a).

                          SUMMARY OF ARGUMENT

   A. Taxpayers using the accrual method of accounting may not deduct
business expenses until the year in which the obligation to pay has
become "fixed and certain." See, e.g., United States v. Hughes
Properties, Inc., No. 85-554 (June 3, 1986), slip op. 7.  One of the
major consequences of this tax accounting system is that, in the
absence of special authorization by Congress, a taxpayer is not
entitled to take a current deduction for amounts set aside as reserves
to cover anticipated future expenses, even though the use of such
reserves is an accepted financial accounting practice.  Reserve
accounting, including the IBNR reserve that respondent seeks to deduct
here, is useful in giving a picture of a corporation's financial
condition, and it advances the principle of accounting conservatism by
accruing liabilities as soon as they can be estimated, thereby erring
on the side of understatement of income.  Because this principle is in
considerable tension with the goal of the tax system to protect the
public fisc, and because the tax system demands certainty, not
estimation, it has long been recognized that reserve accounting is
generally unacceptable as a method of accounting for tax purposes.
See generally Thor Power Tool Co. v. Commissioner, 439 U.S. 522,
541-543 (1979).

   Congress has, on occasion, given specific attention to whether the
general rule against the use of reserve accounting should be modified.
 In the interest of establishing greater conformity between tax and
financial accounting, the Internal Revenue Code of 1954 originally
contained a provision allowing a deduction for additions to reserves
for estimated expenses, a provision that would have permitted the
deduction sought by respondent here.  Indeed, the legislative history
of that provision explicitly listed estimates of "certain liabilities
for self-insured injury and damage claims" as among the expenses that
could be deducted under it.  See H.R. Rep. 1337, 83d Cong., 2d Sess.
A163 (1954).  However, Congress soon recognized that this acceptance
of reserve accounting would have a disastrous impact on the
government's revenue, and it repealed this provision retroactively
less than a year later, thereby restoring the status quo ante under
which the deduction of reserves is not permitted.  See generally
American Automobile Ass'n. v. United States, 367 U.S. 687, 694-697
(1961).

   Since 1921, the Code has contained special provisions relating to
the taxation of insurance companies, and these provisions permit life
and casualty insurance companies to deduct IBNR reserves.  Respondent
is not an insurance company, however, and it is not entitled to the
same special treatment simply because it mimicked insurance company
practice in setting up its own IBNR reserve.  This is so both because
the terms of the Code limit the availability of this deduction to
insurance companies and because the tax policies that underlie this
exception have no application to companies like respondent that are
not in the insurance business.  See generally Brown v. Helvering, 291
U.S. 193, 201 (1934).  On the contrary, the fact that Congress took
special action to make these reserves deductible for insurance
companies, coupled with the fact that Congress repealed a provision
that would have made them deductible for all taxpayers, strongly
suggests that respondent may not take a current deduction for its
additions to its IBNR reserve in the absence of specific authorization
by Congress.  This reserve is little different from any other reserve
established by a taxpayer in anticipation of probable future expenses,
and it is clear under the Code that such reserves are not deductible
because they do not represent a "fixed and certain" obligation to pay.

   B. Respondent's attempt to deduct additions to its IBNR reserve
clearly fails the "all events" test, which has been the standard for
almot 60 years for determining when an item of expense is to be
regarded as "incurred" for federal tax purposes.  The first part of
the test provides that an expense may not be deducted until "all the
events have occurred which determine the fact of the liability"
(Treas. Reg. Section 1.446-1(a)(2)).  That standard is not satisfied
here.  Respondent's IBNR reserve is designed to estimate future
liability for medical services obtained during the taxable year, but
for which a claim either has not been filed, or has been filed but not
yet processed or approved.  Under the terms of its health plans,
however, respondent is not required to make any reimbursement for
medical services until both of these events occur -- the filing of a
claim and its approval for payment.  Accordingly, the $5,575,289
estimate of future liability contained in respondent's reserve did not
represent a "fixed and certain" obligation to make a payment.

   An employee's receipt of medical services by itself creates no
obligation on the part of respondent to pay reimbursement.  It is true
that respondent at that point reasonably can anticipate that it will
have a future obligation to reimburse the employee if he files a claim
and his claim is approved.  But this anticipated obligation is no more
certain than the future liability that respondent could have
anticipated at the time it originally entered into the collective
bargaining contracts under which the health plans were created.  It
was entirely possible that some of the employees who received medical
services in 1972 would never file a claim -- because of inadvertence,
a desire to keep their employer from learning of certain medical
conditions, or other reasons -- and hence respondent would never be
obligated to pay reimbursement for those expenses.  Even as to
employees who had filed claims in 1972, moreover, it was by no means
certain that the claims would be approved for payment.  They could be
denied in whole or in part if respondent determined that the charges
were not reasonable or customary, that the services were not medically
necessary, or that the treatment was for a preexisting condition.  In
short, until a claim for medical services is filed and is approved for
payment by respondent, any reimbursement liability under the plans is
contingent, not fixed and certain.

   Moreover, the amount of respondent's IBNR reserve does not reflect
any actual obligations, fixed or otherwise.  Respondent's $5.5 million
figure was not based on knowledge of even a single individual receipt
of medical services;  it was nothing more than an educated guess as to
aggregate liability based on past experience.  This sort of aggregate
estimate is incompetent as a matter of law to "establish the fact of
the liability" (Treas. Reg. Section 1.446-1(c)(1)(ii)).  A liability
can become "fixed" and satisfy the "all events" test only when it is
based on known facts respecting individual claimants.  See American
Automobile Ass'n v. United States, 367 U.S. at 692.

                               ARGUMENT

 A RESERVE ESTABLSIHED TO COVER THE ESTIMATED COST OF REIMBURSING
EMPLOYEES FOR MEDICAL SERVICES ASSUMED TO HAVE BEEN RENDERED DURING
THE TAXABLE YEAR, WHERE PAYMENT IS CONTINGENT UPON THE FILING AND
PROCESSING OF QUALIFIED CLAIMS IN FUTURE YEARS, IS NOT AN EXPENSE
INCURRED DURING THE TAXABLE YEAR" AND HENCE, CANNOT GIVE RISE TO A
CURRENT BUSINESS-EXPENSE DEDUCTION FOR AN ACCRUAL-BASIS TAXPAYER

   Respondent in this case seeks to take a current tax deduction for
amounts set up as a reserve to cover estimated payments expected to be
made to its employees in future years.  In constructing this "IBNR
reserve," respondent made no attempt to ascertain whether any employee
had in fact received medical services before the close of its tax
year.  Nor did respondent endeavor to ascertain whether employees who
had received medical services would seek or were seeking reimbursement
for them.  Rather, respondent's IBNR reserve represented a mere
projection of its estimated liability, based on statistics concerning
claims paid in past years and on the previous "lag time" between its
employees' receipt of services and its insurers' tender of payment.
See Pet. App. 9a & n.1.  Respondent contends that the amount of this
IBNR reserve -- a reserve computed in precisely the same manner that
life and health insurance companies compute their reserves -- is an
expense "incurred during the taxable year" (I.R.C. Section 162(a))
that can be deducted currently by an accrual-basis taxpayer.

   This contention flies in the face of long-recognized tax accounting
principles.  First and foremost, it erases the basic distinction
between reserves set up for financial accounting purposes to reflect
anticipated future expenses and specific, identifiable obligations
that are genuinely "fixed" within the meaning of the tax law.  Second,
it allows the current deduction of a particular type of reserve that
Congress and the courts have indicated quite clearly is not available
to ordinary accrual-basis taxpayers but rather is available only to
insurance companies.  Finally, respondent's contention rests on a
serious misinterpretation of the "all events" test, which establishes
two prerequisites to the accrual of an expense -- "all the events
(must) have occurred which determine the fact of the liability and the
amount thereof (must) be determin(able) with reasonable accuracy"
(Treas. Reg. Section 1.461-1(a)(2)).  The court of appeals' acceptance
of respondent's contention marks a sharp departure from
well-established rules of tax accounting -- one that threatens a
serious erosion of the fundamental principle that a taxpayer may not
deduct, absent specific congressional authorization, reserves set up
to cover contingent future expenses.

 A. The Amount Of Respondent's Estimated Future Medical Reimbursements
Is Not An Expense Incurred During The Taxable Year, But Rather Is A
Reserve For Future Expenses That Cannot Be Currently Deducted Because
Its Use For That Purpose Has Not Been Specifically Authorized By
Congress

   1. a. Section 162 of the Code allows a deduction for business
expenses "paid" or "incurred" during the taxable year.  A taxpayer who
uses the "cash receipts and disbursements method" of accounting
(I.R.C. Section 446(c)(1)) is entitled to deduct business expenses
only in the year in which they are paid.  Treas. Reg. Sections
1.446-1(c)(1)(i), 1.461-1(a)(1).  A taxpayer who uses the "accrual
method" of accounting (I.R.C. Section 446(c)(2)), as respondent does,
is entitled to deduct expenses in the year they are "incurred"
regardless of when the expenses are actually paid.  Treas. Reg.
Section 1.461-1(a)(2);  see United States v. Anderson, 269 U.S. 422,
424 (1926).  It is well settled that "'to incur' means to become
liable or subject to." Ox Fibre Brush Co. v. Blair, 32 F.2d 42, 47
(4th Cir. 1929), aff'd sub nom. Lucas v. Ox Fibre Brush Co., 281 U.S.
115 (1930).  "(A) liability does not accrue as long as it remains
contingent," even if it is quite probable that an obligation to pay
the liability will become fixed in the near future.  Brown v.
Helvering, 291 U.S. 193, 200 (1934).  See, e.g., United States v.
Hughes Properties, Inc., No. 85-554 (June 3, 1986), slip op. 6-7;
Dixie Pine Co. v. Commissioner, 320 U.S. 516, 519 (1944).  "'The tax
law requires that a deduction be deferred until "all the events" have
occurred that will make it fixed and certain.'" United States v.
Hughes Properties, Inc., slip op. 7 (quoting Thor Power Tool Co. v.
Commissioner, 439 U.S. 522, 543 (1979)).

   One of the major consequences of this tax accounting system is that
taxpayers ordinarily are not entitled to take current deductions for
amounts set aside as reserves to cover anticipated future expenses.
Such reserves are of course a common and entirely appropriate feature
of commercial or financial accounting.  Reserve accounting attempts to
paint an accurate picture of a company's financial condition by
reporting the anticipated results of transactions at the end of a
given year, even though the transactions may not be complete and even
though those results must be estimated.  This is done through the use
of an ongoing reserve account to accumulate estimates of aggregate
expenses expected to be paid in the future, correcting in subsequent
years the errors inherent in predicting future events.  /2/ Accepted
financial accounting principles encourage the practice of using
reserves to cover estimates of future expenses that probably will be
incurred.  See generally, H. Finney & H. Miller, Principles of
Accounting, Intermediate 381-390 (7th ed. 1979).  Indeed, in order to
advance "the principle of conservatism," financial accounting rules
"typically require that a liability be accrued (by establishing it on
the books as a reserve) as soon as it can reasonably be estimated.
Thor Power Tool Co. v. Commissioner, 439 U.S. at 541, 542.  See, e.g.,
Commissioner v. Hansen, 360 U.S. 446, 448 (1959) (reserve to cover
contingent liability in event of nonperformance of guarantee);  Brown
v. Helvering, 291 U.S. at 196-197 (reserve to cover expected liability
in likely event of insurance policy cancellations);  Lucas v. American
Code Co., 280 U.S. 445, 447 (1930) (reserve to cover contingent
liability on contested lawsuit).  The effect of reserve accounting is
thus to accelerate expenses into the earliest year in which it is
possible to make a reasonable prediction that those expenses will
occur, with a corresponding reduction in income as reported for
financial accounting purposes for the year in question.

   Although reserve accounting is indisputably a legitimate and useful
method of financial accounting, /3/ it is as a rule inconsistent both
with the overall objective and with the practical operation of the
accrual method of accounting used for tax purposes.  Under the tax
accrual method, the goal is to assign to each taxable year the
individual items of income and deductions that the taxpayer has become
entitled to receive or has become obligated to pay.  That accrual
method does not allow reporting of any particular item until the right
to receive it or the obligation to pay it has become fixed and
certain.  It is this certainty that makes the accrual method
acceptable for tax accounting.  By the same token, the uncertainty of
reserve accounting, which relies on the aggregation of estimates of
future expenses and the correction in subsequent years of the errors
inherent in making such predictions, renders that method unacceptable
for tax purposes.

   It is well settled that reasonable financial accounting methods are
often impermissible under the tax law.  To say that a taxpayer's
accounting practice "'is in accord with generally accepted commercial
accounting principles,'" this Court has observed, "is not to hold that
for income tax purposes it so clearly reflects income as to be binding
on the Treasury." American Automobile Ass'n v. United States, 367 U.S.
687, 693 (1961) (footnote omitted).  In particular, this Court has
long recognized that reserve accounting is generally unacceptable in
computing taxable income.  In the words of Justice Brandeis, speaking
for the Court:  "The prudent business man often sets up reserves to
cover contingent liabilities.  But they are not allowable as
deductions." Lucas v. American Code Co., 280 U.S. at 452 (footnote
omitted).

   The Court recently reconfirmed and elaborated upon this
proposition, emphasizing "the vastly different objectives that
financial and tax accounting have." Thor Power Tool Co. v.
Commissioner, 439 U.S. at 542.  "The primary goal of financial
accounting is to provide useful information to management,
shareholders, (and) creditors" and thereby "to protect these parties
from being misled" (ibid.).  Moreover, "financial accounting has as
its foundation the principle of conservatism, with its corollary that
'possible errors in measurement (should) be in the direction of
understatement rather than overstatement of net income'" (ibid.,
quoting AICPA Accounting Principles Board, Statement No. 4, Basic
Concepts and Accounting Principles Underlying Financial Statements of
Business Enterpreises Paragraph 171 (1970)).  Therefore, "accounting
principles typically require that a liability be accrued as soon as it
can reasonably be estimated" (439 U.S. at 543 (footnote omitted)).  By
contrast, "(t)he primary goal of the income tax system * * * is the
equitable collection of revenue;  the major responsibility of the
Internal Revenue Service is to protect the public fisc" (id. at 542).
These missions, the Court explained, are incompatible with financial
accounting techniques, such as reserves, that are skewed toward
understatement of income.  The Court accordingly concluded that,
"(g)iven this diversity, even contrariety, of objectives, any
presumptive equivalency between tax and financial accounting would be
unacceptable" (id. at 542-543 (footnote omitted)).  Of particular
relevance to the instant case, the Court noted that "divergence
between tax and financial accounting is especially common when a
taxpayer seeks a current deduction for estimated future expenses or
losses" (id. at 541) -- the precise situation involved here.

   b. This Court's frequent pronouncements about the differences
between tax and financial accounting, particularly concerning the use
of reserves, have long sounded a doleful chord in taxpayers' ears, and
32 years ago, they briefly won relief from Congress.  As this Court
pointed out in American Automobile Ass'n, supra, Congress in 1954
temporarily adopted provisions that would have permitted deferral of
income (Section 452 of the Code) as well as the deduction of
anticipated expenses (Section 462 of the Code) by the use of the
reserve method of accounting employed by respondent here.  See 367
U.S. at 694-697.  Section 462 authorized a deduction by accrual-basis
taxpayers of "a reasonable addition to (a) reserve for estimated
expenses," with "estimated expenses" being defined to include
deductions "attributable to the income of the taxable year or prior
taxable years." Internal Revenue Code of 1954, ch. 736, Section 462(a)
and (d)(1)(B), 68A Stat. 158-159.  See id. Section 452(a), 68A Stat.
152 (companion provision permitting deferral of prepaid income).
Section 462 was designed to bring "(t)ax accounting * * * more nearly
in line with accepted business accounting * * * by allowing reserves
to be established for known future expenses." S. Rep. 372, 84th Cong.,
1st Sess. 3 (1955).  Congress explained that Section 462 would allow
taxpayers to deduct estimated amounts of "certain liabilities for
self-insured injury and damage claims," exactly the types of claims at
issue here.  H.R. Rep. 1337, 83d Cong., 2d Sess. A163 (1954);  S. Rep.
1622, 83d Cong., 2d Sess. 63, 305-307 (1954).

   The radical change brought about by Sections 462 and 452 was
short-lived.  Congress repealed those provisions retroactively less
than one year later, prompted by warnings from the Treasury Department
"that the proposed endorsement of such (methods of) accounting would
have a disastrous impact on the Government's revenue." American
Automobile Ass'n v. United States, 367 U.S. at 695.  See Act of June
15, 1955, ch. 143, Sections 1, 3, 69 Stat. 134-135.  /4/ The taxpayer
in American Automobile Ass'n contended that Congress's retroactive
repeal of these provisions should not be interpreted to preclude use
of the reserve method of accounting that it employed, but the Court
held that this contention "'varnish(ed) nonsense with the charm of
sound'" (367 U.S. at 695).  "(T)he cold fact," the Court said, "is
that (Congress) repealed the only law incontestably permitting the
practice upon which the (taxpayer) depends" (ibid.). In terms equally
appropriate to the instant case, this Court characterized the
retroactive repeal of Sections 452 and 462 as "a mandate from the
congress that (the taxpayer's) system was not acceptable for tax
purposes.  To interpret its careful consideration of the problem
otherwise is to accuse the Congress of engaging in sciamachy." 367
U.S. at 695-696.

   Congress thus has specifically considered and, upon
reconsideration, rescinded a provision that would have allowed tax
deductions for reserves established in accordance with generally
accepted financial accounting principles.  And there can be no doubt
that the $5.5 million reserve for which respondent seeks the $5.5
million reserve for which respondent seeks a deduction here is
precisely the sort of reserve that Congress had in mind in 1954.  The
Claims Court, though it allowed respondent to deduct additions to the
IBNR account, recognized that it was an ordinary reserve.  See Pet.
App. 8a-9a, 13a-14a, 16a-17a.  Indeed, the IBNR account was literally
taken off the books of the insurance companies, where it was
indubitably a reserve, and placed upon respondent's own books.  The
amount contained in the IBNR reserve does not reflect any knowledge on
respondent's part of the numerous future liabilities (in the form of
potential claims for reimbursement) that the account is designed to
represent.  Rather, it is purely an estimate (and a poor one at that,
being off by approximately $1 million) derived from a statistical
analysis of claims that had been paid in the past by respondent's
insurers and of the "lag time" that in the past had typically
intervened between its employees' receipt of medical services and the
insurers' tender of reimbursement.  See Pet. App. 8a-9a & n.1.

   It is of course likely that history will repeat itself, more or
less, and respondent's estimate of its probable future liability may
be quite a useful thing for financial accounting purposes.  But it
simply does not represent an "incurred" expense that can form the
basis for an income tax deduction in the year the estimate is placed
on the books of the corporation.  As this Court explained in Thor
Power Tool Co., 439 U.S. at 543, "(f)inancial accounting * * * is
hospitable to estimates, probabilities, and reasonable certainties;
the tax law, with its mandate to preserve the revenue, can give no
quarter to uncertainty." "(R)easonable estimates may be useful, even
essential, in giving shareholders and creditors an accurate picture of
a firm's overall financial health;  but the accountant's conservatism
cannot bind the Commissioner in his efforts to collect taxes" (ibid.).
 The words that Justice Brandeis penned for the Court in 1934 are thus
equally true today:  "Only a few reserves voluntarily established as a
matter of conservative accounting are authorized by the Revenue Acts."
Brown v. Helvering, 291 U.S. at 201-202.

   2. a. As Justice Brandeis intimated, of course, the general rule
that accounting reserves are unacceptable for tax purposes yields in
those instances where Congress has explicitly authorized particular
categories of taxpayers to use reserves for specified purposes.  Since
1939, for example, the Code has provided that taxpayers in general
shall "be allowed (in the discretion of the Secretary) a deduction for
a reasonable addition to a reserve for bad debts." I.R.C. Section
166(c);  see Internal Revenue Code of 1939, ch. 1, Section 23(k)(1),
53 Stat. 13.  The Code currently authorizes somewhat more generous bad
debt reserves for banks and S&L associations.  See I.R.C. Sections
585, 586, 593.  /5/ And of particular relevance to the present case,
the Code for over 60 years has authorized the use of various types of
reserves, including IBNR reserves, by insurance companies.  Because
respondent is not an "insurance company," these provisions strongly
suggest that the deduction respondent seeks for its IBNR reserve is
impermissible.

   In 1921, Congress concluded that the then-existing system of taxing
insurance companies under the same provisions applicable to other
corporations was unsatisfactory.  Accordingly, Congress established
special provisions for the taxation of life insurance companies
(Revenue Act of 1921, ch. 136, Sections 242-245, 42 Stat. 261) and
other insurance companies (id. Sections 246-247, 42 Stat. 262-263).
These provisions have been amended on numerous occasions on the road
to their present incarnation in Subchapter L (I.R.C. Sections
801-845), but at all times since 1921 insurance companies have been
taxed under provisions inapplicable to other enterprises.  /6/

   Significantly, Subchapter L contains some of the few instances in
which the Code specifically authorizes the use of reserve accounting.
Section 807 provides in detail for the use of reserves -- generally
required and regulated by state law -- by "life insurance companies"
as defined in Section 816.  See I.R.C. Sections 807, 816(a) and (b).
Casualty insurance companies are similarly entitled to deduct reserves
set up in accordance with standard industry practice to cover "unpaid
losses" suffered during the taxable year.  See I.R.C. Section
832(b)(5);  Treas. Reg. Section 1.832-4(b) (requiring casualty
insurance companies to satisfy the Commissioner that reserves for
unpaid losses reflect "amounts which, based upon the facts in each
case and the company's experience with similar cases, can be said to
represent a fair and reasonable estimate of the amount the company
will be required to pay").  Specifically, the "incurred but not yet
reported" or "IBNR" reserves generally maintained by casualty
insurance companies may be deducted by those companies pursuant to
Subchapter L.  See generally Maryland Savings-Share Ins. Corp. v.
United States, 644 F.2d 16, 24-25 (Ct. Cl. 1981).  In the instant
case, for example, the Claims Court noted that, "(p)rior to October 1,
1972, Aetna and Prudential deducted their IBNR reserves in the taxable
year (in which) the (medical) services were received" by respondent's
employees.  Pet. App. 8a.

   Thus, the Code does provide special authorization for insurance
companies to use reserves analogous to the one that respondent seeks
to deduct here.  Although the courts below adverted to this fact, they
refused to draw the negative inference that we believe should properly
be drawn from it.  The Claims Court noted that respondent's method of
computing its IBNR reserve "reflected accepted insurance company
practice" and that "insurance companies can and do deduct such
reserves" (Pet. App. 9a).  That is certainly true and, indeed, is
something of an understatement.  Respondent did not merely compute its
reserve in accordance with accepted insurance company practice;  it
established its IBNR account by literally transferring to its own
books the precise amount that its insurers had previously maintained
in their IBNR reserves in connection with respondent's policies.  /7/
And in augmenting its IBNR reserve at the end of the year, respondent
added an amount that was explicitly based on the recommendations of
its former insurers.  Pet. App. 8a-9a & n.1.

   But the fact that respondent has rather accurately mimicked
insurance company practice in setting up its IBNR account does not
entitle it to a tax deduction.  The Code expressly limits to insurance
companies the authorization to deduct insurance reserves, and
respondent, as it concedes (Br. in Opp. 22), is not an "insurance
company." The fact that the Code makes special provision for insurance
companies to deduct these reserves strongly suggests that they are not
generally deductible by other taxpayers, else the special provision
for insurance companies would be superfluous.  Hence, the very fact
that respondent's IBNR reserve is a copy of those maintained by
insurance companies provides weighty evidence that the court of
appeals erred in allowing respondent to take a current deduction for
additions to that reserve.

   b. This Court has long recognized that ordinary taxpayers may not
avail themselves of the specialized treatment that the Code has
conferred on insurance companies.  In Brown v. Helvering, supra, the
Court rejected the taxpayer's claim that he was entitled to take a
deduction for anticipated "return premium" expenses -- a deduction
that the Code explicitly made available to insurance companies.  "The
simple answer," the Court explained, "is that the (taxpayer) is not an
insurance company;  * * * the deductions allowed for additions to the
reserves of insurance companies are technical in character and are
specifically provided for in the Revenue Acts" (291 U.S. at 201).

   The principle enunciated in Brown v. Helvering, supra, has also
been applied by numerous lower courts that have refused to permit
taxpayers to deduct additions to so-called "self-insurance" reserves.
/8/ A taxpayer that wishes to provide against potential future
liabilities generally has two options at its disposal.  It may
purchase insurance from an outside carrier, the purchase price being
represented by the obligation to pay annual premiums.  If the taxpayer
is unable to acquire insurance from an outside carrier, or if it
believes such insurance to be too expensive, it may elect instead to
"self-insure," that is, to undertake to discharge future liabilities
out of its own funds.  In the latter event, the taxpayer's undertaking
will typically be reflected on its balance sheet by a reserve account
set up to cover those estimated future costs.

   When a taxpayer elects to buy insurance from an outside carrier,
the premiums paid or incurred are of course deductible currently as
business expenses.  See I.R.C. Section 162;  Treas. Reg. Section
1.162-1(a) ("Among the items included in business expenses are * * *
insurance premiums against fire, storm, theft, accident, or other
similar losses.").  When a taxpayer elects to "self-insure," on the
other hand, the courts have consistently denied deductions for
additions to the self-insurance reserve, reasoning that the taxpayer
has not externalized or "shifted" the risk of loss to another party by
the payment of premiums, and that the taxpayer has not parted with
anything by establishing a mere "reserve account" on its books.  See,
e.g., Steere Tank Lines, Inc. v. United States, 577 F.2d 279 (5th Cir.
1978), cert. denied, 440 U.S. 946 (1979).  And the courts have reached
the same result where a corporate taxpayer undertakes to pay purported
"premiums" to a wholly-owned or "captive" insurance company, correctly
reasoning that there is no externalization or distribution of risk
given the identity of interests between the so-called "insurer" and
so-called "insured." See, e.g., Beech Aircraft Corp. v. United States,
No. 84-2658 (10th Cir. Aug. 6, 1986);  Carnation Co. v. United States,
640 F.2d 1010 (9th Cir.), cert. denied, 454 U.S. 965 (1981).  See
generally Rev. Rul. 77-316, 1977-2 C.B. 53;  Bradley & Winslow,
Self-Insurance Plans and Captive Insurance Companies -- A Perspective
on Recent Tax Developments, 4 Am. J. Tax Pol'y 217 (1985);  O'Brien &
Tung, Captive Off-Shore Insurance Corporations, 31 N.Y.U. Inst. Fed.
Tax'n 665 (1973).

   c. The precept that the special treatment accorded by the Code to
insurance companies cannot be extended by anaology to other taxpayers
is thus well established in this Court's decisions and in the
decisions of the lower courts.  This distinction between "insurance"
and "self-insurance," moreover, is not merely a technical one, but is
rooted in the fundamental policy goal of obtaining an accurate
statement of income for tax purposes.  The legislative history of the
short-lived Section 462 of the 1954 Code demonstrates that Congress
did not view "self-insurers" as at all analogous to insurance
companies.  Both committee reports listed estimates of "certain
liabilities for self-insured injury and damage claims" as among the
expenses that the now-repealed Section 462 was meant to permit
taxpayers to deduct.  H.R. Rep. 1337, supra, at A163;  S. Rep. 1622,
supra, at 63, 305-307.  Clearly, Congress's view was that reserves for
estimated expenses could not have been accrued by ordinary taxpayers
before the enactment of Section 462, and the calculated repeal of that
Section was "a mandate from the Congress" that an accounting method
entailing such reserves "was not acceptable for tax purposes"
(American Automotible Ass'n v. United States, 367 U.S. at 695).

   The reasons why self-insurers like respondent should not be given
the benefit of reserve deductions available to insurance companies are
fairly clear. "Self-insurance is not the equivalent of insurance"
(Beech Aircraft Corp. v. United States, slip op. 5), and respondent is
not like an insurance company at all.  It is subject neither to state
regulation that applies to insurance companies nor to the provisions
of the Internal Revenue Code that generally apply to such companies.
It is not engaged in the insurance business of spreading risk among
various policyholders.  See Helvering v. Le Gierse, 312 U.S. 531, 539
(1941).  Rather, it simply has undertaken as part of its collective
bargaining agreement to provide certain health benefits to its
employees as a wage substitute.  Respondent could provide those
benefits through a conduit by taking out an insurance policy, but
instead it has chosen, by becoming a "self-insurer," to provide the
benefits directly.

   More importantly, the peculiarities of insurance companies that
impelled Congress to give them special tax treatment, including the
right to use IBNR reserves, do not apply to ordinary taxpayers like
respondent.  An insurance company receives large amounts of income in
the form of premium payments.  The company does not have unrestricted
use of those funds, however, because state law requires it to reserve
a substantial portion in order to pay future claims under the policies
for which the premiums have been paid.  If the Code did not permit the
company to accrue the additions to its IBNR reserve, the result would
be an unrealistic overstatement of income in the year the premiums
were received because of the inclusion of all of the premium income
without any offset for related expenses.  See Bituminous Casualty
Corp. v. Commissioner, 57 T.C. 58, 77 (1971).  This mismatching
problem plainly is not found in the case of a self-insurer like
respondent, who receives no premium income and is not subject to
analogous state law restrictions on the use of its funds.  Rather, the
IBNR reserve established by respondent is little different from any
other reserve established by a taxpayer in anticipation of probable
future expenses, and respondent should not be able to take a current
deduction for additions to that reserve.

 B. Respondent's Attempt To Deduct Additions To Its IBNR Reserve Fails
The "All Events" Test

   In its brief in opposition, respondent professes to disagree with
few of the general propositions that we have outlined above.
Respondent concedes that its IBNR account is a garden-variety reserve,
that taxpayers generally are precluded from deducting self-insurance
reserves, and that it cannot avail itself of the special provisions
permitting IBNR reserves to be deducted by insurance companies.  See
Br. in Opp. 21-22.  Respondent contends, however, that these
propositions are irrelevancies in the instant case, asserting that its
particular IBNR reserve also happens to qualify for deduction under
the "all events" test governing deductions by accrual-basis taxpayers
generally.

   In light of the general hostility of the tax system to the use of
reserves, and in light of Congress's specific decisions to authorize
the use of IBNR reserves by insurance companies and to rescind a
short-lived provision that would have allowed other taxpayers to use
them, respondent's contention should be greeted at the threshold with
a healthy degree of skepticism.  In any event, we shall demonstrate
that respondent's contention is incorrect.  The idea that any taxpayer
has always been free to deduct an IBNR reserve under the general
standard applicable to accrual-basis taxpayers -- an idea that
respondent convinced the courts below to accept -- rests on a serious
misapplication of the "all events" test.  Applied correctly, the test
confirms that respondent is not entitled to take a current deduction
for its estimate of its potential future liabilities.  In the words of
the Tax Court, the deduction of casualty insurance reserves by
ordinary accrual-basis taxpayers is "fundamentally at odds with the
'all events' test." Bituminous Casualty Corp. v. Commissioner, 57 T.C.
at 77.

   1. The "all events" test has been the standard for determining when
an item of expense is to be regarded as "incurred" for federal tax
purposes for almost sixty years.  The test originated in United States
v. Anderson, 269 U.S. at 441, where this Court stated that an expense
may be accrued in the year in which "all the events * * * occur which
fix the amount * * * and determine the liability of the taxpayer to
pay it." The "all events" test has since been incorporated in the
Treasury Regulations.  See Treas. Reg. Section 1.446-1(c)(1)(ii)
(accruals in general), Section 1.451-1(a) (accrual of income), Section
1.461-1(a)(2) (accrual of deductions).  The test has come to be
recognized as "a fundamental principle of tax accounting" and as "'the
"touchstone" for determining the year in which an item of deduction
accrues.'" United States v. Hughes Properties, Inc., slip op. 6
(quoting United States v. Consolidated Edison Co., 366 U.S. 380, 385
(1961)).  /9/

   The "all events" test has two elements, both of which must be
satisfied before accrual of an expense is proper.  First, "all the
events (must) have occurred which establish the fact of the liability
giving rise to (the) deduction" (Treas. Reg. Section
1.446-1(c)(1)(ii)).  Second, the amount of the deduction must be
capable of being "determined with reasonable accuracy" (ibid.).  The
second part of the test permits a degree of computational flexibility.
 See Lucas v. American Code Co., 280 U.S. at 450;  Treas. Reg. Section
1.461-1(a)(2).  But the Regulations emphasize that the first part of
the test is absolute:  "no accrual shall be made in any case (unless)
all of the events have * * * occurred which fix the liability"
(ibid.).

   This Court has used various phrases to describe the effect of the
"all events" test.  To be deductible for federal tax purposes, "the
obligation to pay (must) ha(ve) become final and definite." Security
Flour Mills Co. v. Commissioner, 321 U.S. 281, 287 (1944).  It must be
"fixed and absolute." Brown v. Helvering, 291 U.S. at 201.  It must be
"unconditional." Lucas v. North Texas Lumber Co., 281 U.S. 11, 13
(1930).  And, more recently, the Court has explained that a deduction
must be deferred "until all the events have occurred that will make it
fixed and certain." Thor Power Tool Co. v. Commissioner, 439 U.S. at
543 (original quotation marks omitted).  See generally United States
v. Hughes Properties, Inc., slip op. 6-7.

   Regardless of the formulation chosen, respondent's contention that
it can deduct additions to its IBNR reserve simply does not satisfy
the necessary conditions.  It clearly fails the first part of the "all
events" test.  /10/ This failure is manifest when one considers the
multiple events that had to occur before respondent had any "fixed
obligation" to reimburse its employees -- a chain of events that was
not complete until after respondent's 1972 tax year closed.

   When respondent originally entered into its collective bargaining
contracts, it could reasonably have assumed, as a matter of
probability, that it would ultimately have to pay out substantial sums
to reimburse employees for medical services that they would incur.  It
might have been prudent for respondent to set up a reserve on its
books at that time in order to reflect its duty to pay reimbursement
over the life of the contracts.  But respondent was plainly under no
obligation to pay reimbursement to anyone when it signed the
contracts, and it thus could not properly have accrued such a
liability at that time.

   When respondent closed the books on its 1972 tax year, it again
reasonably assumed, as a matter of probability, that some of its
employees had gone to the doctor during 1972 without yet being
reimbursed, and that it would ultimately have to reimburse them for
the medical services that they presumably had received.  It was thus
prudent for respondent to establish a reserve on its books in order to
reflect its probable liability to pay those estimated sums in
post-1972 tax years.  But respondent at the close of 1972 still had no
obligation to pay anyone the amounts reflected in its IBNR reserve.
On our view, therefore, respondent could not properly accrue such a
liability then, any more than it could properly have accrued such a
liability when it signed the collective bargaining contracts to begin
with.

   When respondent subsequently learned that some of its employees had
in fact gone to the doctor during 1972, that information would have
further increased the probability that respondent would ultimately
have to pay some reimbursement, and it perhaps would have given
respondent data from which to estimate its potential liability more
accurately.  But respondent at that time still had no obligation to
make any payment to anyone.  Rather, under the terms of the health
plans established pursuant to the collective bargaining contracts,
respondent had no obligation to pay, and did not in fact pay, any
reimbursement unless and until (1) an employee submitted a claim
complete with supporting documentation and (2) respondent and its
agents processed the claim and thereby satisfied themselves that the
claim qualified for payment in a determinable amount.  Until these two
events occurred, respondent had no "fixed and certain" obligation to
pay out any funds.  And as to every putative obligee-employee
reflected in the IBNR reserve at the end of 1972, one or both of these
conditions had not yet been met.

   Many of the employees that respondent assumed to have received
medical services during 1972 had not submitted any claim for
reimbursement before the year ended.  See Pet. App. 8a.  It was
entirely possible, moreover, that some of those employees would never
submit a claim at all.  Some might regard the medical expenses that
they had incurred as too insignificant to warrant the trouble of
seeking reimbursement.  Some might prefer that their employer's agents
not learn that they had undergone treatment for certain medical
conditions.  And some might fail to submit claims because of
inadvertence or neglect.  In all of these instances, respondent would
never be required to make reimbursement because it was not obliged to
pay until an employee filed a claim in writing supported by
appropriate documentation.  Respondent's obligation to reimburse
employees who had received medical services in 1972, but who had
submitted no claims before the year ended, was thus neither
"unconditional" nor "absolute" as of December 31, 1972.  /11/

   The fact that an employee's filing of a claim is one of the events
necessary to "establish the fact of liability" under respondent's
health plans is alone enough to require the rejection of any IBNR
reserve deduction.  That deduction also fails, however, because there
is yet one additional and final event that must occur before the
health plans create a fixed obligaton to pay -- the approval of the
claim for payment after consideration and investigation by respondent
and its agents.  Once an employee has actually submitted a claim,
respondent maintains the right to refuse reimbursement on numerous
grounds.  Claims can be denied, inter alia, on the ground that the
treatment was not covered by the health plans, that the treatment was
not "medically necessary," that the charges exceeded those that are
reasonable and customary, that the illness for which the treatment was
sought was a "pre-existing condition," or that the expenditures
otherwise failed to qualify as a "covered medical expense." Although
the Claims Court characterized the claims processing procedures as
"ministerial" and "administrative" (Pet. App. 12a), /12/ the court
found that only 90% of the amounts claimed by respondent's employees,
on average, were actually approved for payment (id. at 12a-13a).
Because there thus existed a substantial possibility that any
particular claim, once filed, would be denied in whole or in part,
respondent's obligation to make payment to these individuals, like its
liability to pay those who had not filed claims at all, was neither
"unconditional" nor "absolute" at the close of the 1972 tax year.
/13/

   2. a. The Claims Court below held that respondent's liability "was
not based on the filing of a claim" but rather became "fixed under the
* * * self-insured plans upon occurrence of the insured event -- the
receipt of covered services by (respondent's employees)" (Pet. App.
15a).  Respondent similarly contends that, "(o)nce the (medical)
services were received," its obligation to pay reimbursement "was
contingent no longer" because it "could not avoid liability" (Br. in
Opp. 14).  But this statement is simply incorrect.  Even after an
employee had received medical services, respondent would indisputably
"avoid liability" if (1) the employee did not file a
properly-documented claim for reimbursement or (2) respondent
determined that a filed claim did not qualify for payment.  An
employee's visit to a doctor, like respondent's antecedent signing of
the collective bargaining agreement, was a necessary but insufficient
condition to create an obligation to pay on respondent's part.  An
employee's receipt of medical services undeniably fixed that
employee's liability to pay the doctor for the services that he had
received.  But respondent's liability was not to pay the doctor, but
rather to reimburse the employee.  And respondent had no obligation to
reimburse any employee until that individual had filed a claim and
that claim had been approved.

   The fact that the seminal event triggering the liability under the
collective bargaining agreement can be said to have occurred in 1972,
is, of course, irrelevant under the "all events" test, which turns on
when the obligation to pay becomes fixed and certain.  Until it has
resolved the uncertainty about reimbursement by approving the claim
for payment, respondent is in precisely the same position as the
taxpayer in Lucas v. American Code Co., supra, who tried to take a
deduction for a contractual liability that arose in the taxable year,
but did not become certain until the resolution of a lawsuit at some
future time.  Under the "all events" test, tax accounting must look to
the time when an obligation to make payment becomes certain, not to
the moment when the underlying obligation arises in a contractual
sense.  In this case, that obligation did not become certain until a
claim for reimbursement was filed and was processed by respondent.
/14/

   b. Besides failing to reflect fixed obligations, the amounts
comprising respondent's IBNR reserve do not reflect any actual
obligations, fixed or otherwise.  Respondent made no effort to
ascertain whether any employee had in fact received medical services
before the close of the 1972 tax year.  Rather, respondent simply
assumed, based on projections from past experience of Aetna and
Prudential, that a substantial number of employees had received
covered medical services during this period, and that their claims
ultimately would lead to more than $5.5 million in payments.  The
amounts shown in the IBNR reserve thus represented nothing more than
an educated guess as to aggregate liability.  Although it was of
course likely that some employees had gone to the doctor during the
last quarter of 1972, respondent could not definitively state that a
single employee had incurred a single penny in covered medical
services during that time.  Respondent thus seeks to take a $5.5
million deduction without being able to identify any actual
obligations that are reflected in that amount.

   This sort of aggregate estimate is incompetent as a matter of law
to "establish the fact of the liability" (Treas. Reg. Section
1.446-1(c)(1)(ii)).  It is well settled that a liability becomes
"fixed" only when it is based on known facts respecting individual
claimants;  an estimate suggested by past experience is insufficient
to satisfy the "all events" test.  Respondent here is in the same
position as the taxpayer in Brown v. Helvering, supra, who was
practically certain that he would have a significant future liability
for return premiums because past experience suggested that some
policies written during any given year would inevitably be cancelled
later on.  See 291 U.S. at 197-198, 201 n.7.  But this Court held that
the taxpayer could not deduct his estimate of that aggregate liability
because "(i)n respect to no particular policy written within the year
could it be known that it would be cancelled in a future year." Id. at
201.

   This Court sounded the same theme in American Automobile Ass'n,
supra, when it explained that aggregate statistical estimates, while
satisfactory for financial accounting purposes, are unacceptable in
tax accounting.  When a company projects an expense on a statistical
basis "without regard to * * * individual expense * * *, but
consistently with overall experience, (its) accounting doubtless
presents a rather accurate image of the total financial structure, but
(it) fails to respect the criteria of annual tax accounting and may be
rejected by the Commissioner." 367 U.S. at 692.  In short, "'the fact
that the percentage of items which will be paid can be estimated with
reasonable accurracy is not sufficient to support accruals.  The
individual items must represent fixed liabilities.'" Union Pac. R.R.
v. United States, 524 F.2d 1343, 1351 (Ct. Cl. 1975), cert. denied,
429 U.S. 827 (1976) (quoting Denver & Rio Grande Western R.R. v.
Commissioner, 38 T.C. 557, 572 (1962)).

   c. The impermissibility of respondent's attempt to deduct a
statistical estimate of its aggregate liability is well illustrated by
the course of decisions in Milwaukee & Suburban Transport Corp. v.
Commissioner, 18 T.C.M. (CCH) 1039 (1959), rev'd in part, 283 F.2d 279
(7th Cir. 1960), vacated and remanded, 367 U.S. 906, on remand, 293
F.2d 628 (1961).  The facts there were quite similar to those here.
The taxpayer created on its books a self-insurance reserve
representing its year-end estimate of the probable amounts that it
would have to pay in the future on claims arising out of accidents in
which its equipment was involved during the taxable year (18 T.C.M. at
1049).  Part of this reserve reflected anticipated liability on
"potential claims" that had not been filed before the close of the tax
year (id. at 1048, 1050).  The balance reflected anticipated liability
on claims that had been filed but on which the taxpayer either
actively contested or "did not during (the taxable) year() admit its
liability" (id. at 1049-1050).  The taxpayer conceded that it had no
specific year-end liability to any individual claimant, but argued
that, if the claims were "viewed in the aggregate, it (could) be taken
as certain that (it would) have some liability and that estimates of
its total net liability with respect to the aggregate of (the) claims"
should be deductible (id. at 1050).  The Tax Court, relying on this
Court's decision in Brown v. Helvering, supra, rejected the taxpayer's
argument, refusing to permit the taxpayer to deduct "a reserve for
contingent liabilities in respect of unsettled and potential claims"
(18 T.C.M. at 1050-1051 (citing 291 U.S. at 201)).

   The Seventh Circuit reversed the Tax Court's judgment on this issue
and held that the reserve was deductible (283 F.2d at 283-288).  The
court of appeals emphasized that "(t)he accidents out of which the
various claims gr(e)w undoubtedly ha(d) occurred" during the taxable
year (283 F.2d at 286), and it held that this was sufficient to fix
the taxpayer's liability under the "all events" test.  "Because of the
number of claims," the court reasoned, "it is apparent to everyone
that there is going to be liability, and the only question is (o)n
which particular claims this liability will occur.  * * * If overall
liability can be accurately predicted, there should not be any
objection to the fact that it cannot be tied down securely (o)n any
particular claim" (id. at 287).  /15/

   The Commissioner petitioned for certiorari.  Commissioner v.
Milwaukee & Suburban Transport Corp. (No. 843, 1960 Term).  This Court
granted the petition, vacated the Seventh Circuit's judgment, and
remanded for reconsideration in light of American Automobile Ass'n v.
United States, supra.  See 367 U.S. 906 (1961) (citing 367 U.S. 687).
On remand, the Seventh Circuit recalled its mandate, vacated its
judgment, and affirmed the Tax Court "with reference to the accounting
method issue." 293 F.2d 628 (1961).  In so doing, the Seventh Circuit
correctly concluded that the deduction of a self-insurance reserve
representing a mere statistical estimate of aggregate liability is
impermissible under the reasoning that this Court adopted in American
Automobile Ass'n.  That conclusion is equally applicable in the
instant case, and we believe that it dictates reversal of the Federal
Circuit's judgment.

   d. Respondent suggests (Br. in Opp. 6, 15, 20) that the lack of
certainty in its IBNR reserve is not a theoretical problem, but only a
practical difficulty that assertedly arises because it is a large
corporation with many employees.  "If a claims processor had been at
the hospital on the day an employee was discharged," respondent says,
"the processor could have processed and calculated the amount of the
medical benefit at that time" (Br. in Opp. 6).  Respondent points out
that it "had approximately 56,000 employees in 1972" and that to have
stationed claims processors at multiple locations around the country
would have entailed an unreasonably burdensome expense (id. at 20).
Because an employer with relatively few employees could accomplish
this feat more inexpensively, and thus satisfy the "all events test"
on our view of the law, respondent concludes that our position
discriminates against large employers and thus produces an "irrational
and unjustifiable" result (Br. in Opp. 20).

   This contention is quite beside the point.  Respondent of course is
correct in asserting that (1) if it had stationed a claims processor
at the doctor's office and (2) if the processor had given a claim form
to the employee and (3) if the employee had filled out the form and
submitted it to the processor and (4) if the processor had reviewed
the claim and approved it for payment in full and (5) if all those
events had occurred before December 31, 1972, then respondent would
have been able to deduct its liability to reimburse that employee as a
1972 business expense.  But that is only to say that respondent could
have structured its medical plan in a way that would have enabled it
to pass, rather than doomed it to fail, the "all events" test.
Obviously, whenever the timing of a deduction is at stake, a taxpayer
may have at his disposal various steps that he might take to
accelerate into the current tax year the "last event" necessary to fix
his obligation, with the result that he would qualify for a current
tax deduction.  In deciding whether to take those steps, a
cost-efficient taxpayer will compare the expense of doing so to the
benefit he would gain, in terms of the time value of money, by getting
his deduction this year rather than next.  In the instant case,
respondent decided not to station claims processors in doctors'
offices around the country, and that decision was probably a rational
economic judgment.  But the consequence of that decision is that many
claims for 1972 medical services were not filed by employees or
approved by respondent until after the tax year closed, with the
result that respondent failed the "all events" test and thus must
defer its tax deduction until 1973 or later.  A corporation that
declines, for sensible business reasons, to undertake steps necessary
to garner a current tax benefit cannot be heard to complain.  As this
Court put it in Thor Power Tool Co., 439 U.S. at 545-546:  "There is *
* * no reason why (a taxpayer) should be entitled, for tax purposes,
to have its cake and to eat it too."

   e. The fact that respondent's IBNR reserve represented a mere
statistical estimate of aggregate liability, rather than a set of
specific and individualized obligations, highlights the sharp
difference between this case and United States v. Hughes Properties,
Inc., supra.  In Hughes Properties, the Court held that the taxpayer
could accrue the amounts shown on the jackpot meters of its
progressive slot machines at the close of the taxable year.  Nevada
law created a statutory obligation for the taxpayer to maintain the
amounts displayed on the meters and to pay them to the eventual
winner.  See slip op. 8.  This Court held that this obligation was
sufficiently "fixed and certain" to satisfy the "all events" test:
"(a) part of the machine's intake was to be paid out, that amount was
known, and only the exact time of payment and the identity of the
winner remained for the future" (slip op. 10).  In marked contrast to
the situation in the instant case, the taxpayer's accountant in Hughes
Properties could walk around its place of business at the close of the
taxable year and point to the individual fixed obligations --
emblazoned on the face of each progessive slot machine -- that the
taxpayer sought to deduct.  Here, respondent cannot point to any
specific and individual obligation at the close of the taxable year.
It seeks, rather, to deduct an aggregate estimate of the liabilities
that will become fixed in the future if and when individual employees
file claims for reimbursement and those individual claims are approved
for payment.  Although Congress has chosen to permit insurance
companies to deduct reserves computed in this way, Congress has not
extended that benefit to ordinary accrual-basis taxpayers, and this
Court's decisions confirm that the deduction respondent seeks for its
IBNR reserve is impermissible.

                              CONCLUSION

   The judgment of the court of appeals should be reversed.

   Respectfully submitted.

   CHARLES FRIED

      Solicitor General

   ROGER M. OLSEN

      Assistant Attorney General

   ALAN I. HOROWITZ

      Assistant to the Solicitor General

   DAVID ENGLISH CARMACK

   WILLIAM A. WHITLEDGE

      Attorneys

   SEPTEMBER 1986

   /1/ The tax controversy at issue arises out of a single
consolidated income tax return filed by General Dynamics Corporation
on behalf of itself and its respondent subsidiaries.  See Pet. App.
10a;  Sections 1501-1505 of the Internal Revenue Code of 1954 (26
U.S.C.), as amended (the Code or I.R.C.).  For convenience, we will
use the term "respondent" to refer to the respondent corporations
collectively.  Although each corporation maintains its own medical
benefits plan, there is no significant difference between the plans'
respective modes of operation.

   /2/ Mechanically, a reserve is nothing more than an entry in an
accounting record.  Geyer, Cornell & Newell, Inc. v. Commissioner, 6
T.C. 96, 100 (1946).  In the first year a reserve is used, the
estimated expense is deducted from revenues and is added to the
reserve account, which is carried as a liability on the company's
balance sheet.  The effect of this is to reduce the company's reported
income for year one.  In a subsequent year, when the previously
estimated expense is finally paid, the actual cost incurred is charged
to (removed from) the reserve instead of being charged as an expense
against that year's income.  Any differences between the actual amount
paid and the estimated amount is accounted for at the end of the later
year.  See e.g., Levelland Savings & Loan Ass'n v. United States, 421
F.2d 243, 247 (5th Cir. 1970);  Hawes Corp. v. Commissioner, 44 T.C.
705, 707-709 (1965).  At the end of each succeeding year, the total
amount of estimated liability is compared to the reserve balance.  If
the former exceeds the latter, an addition is made to the reserve, and
is treated as an expense in that year, in the amount necessary to
bring the reserve balance up to the total amount of estimated
liability.  Conversely, if the reserve balance exceeds the total
amount of estimated liability, the reserve is reduced accordingly, and
the amount of the reduction is taken into income.  Because additions
to and reductions of the reserve represent the difference between the
amount of estimated liability and the reserve balance, the reserve is
self-correcting over time;  excessive estimates in a prior year are
corected by recording a smaller expense for additions to the reserve
in subsequent years.  See, e.g., Bird Management, Inc. v.
Commissioner, 48 T.C. 586, 595-597 (1967);  Calavo, Inc. v.
Commissioner, 304 F.2d 650, 654 (9th Cir. 1962).  A reserve thus does
not operate to increase the amount of an expense but rather to
accelerate the time at which the expense is offset against income.
See Knight-Ridder Newspapers v. United States, 743 F.2d 781, 799 (11th
Cir. 1984).

   /3/ This Court has referred to the use of a reserve as a "method of
accounting." Nash v. United States, 398 U.S. 1, 2 (1970);  Brown v.
Helvering, 291 U.S. at 197.  See also Knight-Ridder Newspapers v.
United States, 743 F.2d at 797-800;  H.R. Rep. 1337, 83d Cong., 2d
Sess. 48-49 (1954);  S. Rep. 1622, 83d Cong., 2d Sess. 300 (1954).

   /4/ The Treasury Department had revised upward its projection of
estimated revenue loss due to these provisions from $47 million to $1
billion.  H.R. Rep. 293, 84th Cong., 1st Sess. 3 (1955).

   /5/ This venerable exception to the general prohibition against the
use of reserves for tax purposes appears likely to be narrowed soon.
The House version of the 1986 tax reform bill would eliminate the
availability of bad-debt reserves for banks with assets in excess of
$500 million, and news reports indicate that that provision has been
retained by the Conference Committee.  See H.R. 3838, 99th Cong., 1st
Sess. Section 801 (1985);  N.Y. Times, Aug. 18, 1986, at B7.

   /6/ See generally Tye, Taxation of Insurance Companies, 2 Tax L.
Rev. 509 (1947);  Vickrey, Insurance Under the Federal Income Tax, 52
Yale L.J. 554 (1943);  Alinco Life Ins. Co. v. United States, 373 F.2d
336, 345-348 (Ct. Cl. 1967).

   /7/ When respondent terminated its outside insurance policies and
made the shift to self-insurance, its insurers paid to it the funds
represented by the initial IBNR reserve amount in return for
respondent's assumption of the potential liability for the claims
reserved against.  Although the record is silent on the matter,
respondent stated in the court of appeals (C.A. Br. 48 n.**) that this
amount was included in its taxable income, apparently as a refund of
insurance premiums that it had previously paid to the insurance
companies and deducted on its tax returns.  See Hillsboro Nat'l Bank
v. Commissioner, 460 U.S. 370 (1983).

   /8/ The term "self-insurance," of course, is strictly speaking an
oxymoron, since it is impossible for a person to "insure" himself.
See generally Helvering v. Le Gierse, 312 U.S. 531 (1941).

   /9/ In 1984, Congress set forth for the first time a statutory
definition of the "all events" test, providing that "the all events
test is met with respect to any item if all events have occurred which
determine the fact of liability and the amount of such liability can
be determined with reasonable accuracy." Deficit Reduction Act of
1984, Pub. L. No. 98-369, Section 91(a), 98 Stat. 598-601 (adding
I.R.C. Section 461(h)(4)).  This definition, of course, accords with
that previously enunciated by this Court and by the Treasury
Regulations.  This definition was enacted as part of a broader
amendment designed to establish more specific rules for accrual of
deductions -- rules that entail postponement of the accrual of some
deductions that might be held to satisfy the "all events" test -- by
requiring that expenses generally not be accrued until "economic
performance" has occurred.  I.R.C. Section 461(h) and (i).  Section
461(h)(1) of the Code now provides that, "in determining whether an
amount has been incurred with respect to any item during any taxable
year, the all events test shall not be treated as met any earlier than
when economic performance with respect to such item occurs." Where the
taxpayer's liability arises from the provision of goods or services,
or from the use of property, "economic performance" is generally
deemed to occur when the goods or services are actually provided, or
when the property is actually used (I.R.C. Section 461(h)(2)(A) and
(B)).  Where the taxpayer's liability arises from a workers'
compensation statute or tort, "economic performance" is deemed to
occur when payments to the recipient are actually made (I.R.C. Section
461(h)(2)(C)).  The 1984 Act makes an exception to this general rule
for "certain recurring items" (I.R.C. Section 461(h)(3)).  Such items
may be deducted in the year preceding economic performance if the "all
events" test is met and if several other conditions specified in the
statute are satisfied -- including the requirement that economic
performance actually occur within a "reasonable period" (typically, 8
1/2 months) after the close of the tax year.  These provisions, which
are generally effective for post-1983 tax years (Pub. L. No. 98-369,
Section 91(g), 98 Stat. 608), have no application to the instant case,
which involves respondent's tax liability for 1972.  The decision in
this case, however, will be highly relevant to the administration of
the new provisions because the applicability of the "recurring items"
exception turns in part on whether the "all events" test is met.

   /10/ We note that it is highly questionable whether respondent's
claimed deduction meets the second part of the "all events" test
either.  The disparity between the estimated liability of $5,575,289
and respondent's actual payments of $4,583,893 is approximately $1
million.  See Pet. App. 16a.  We do not agree that an estimation error
of nearly 20% for amounts of this magnitude is a determination "with
reasonable accuracy" within the meaning of the "all events" test.
Although the courts below rejected our contention in this respect, we
have not presented the "reasonable accuracy" issue for this Court's
review because of the essentially factual nature of that question.
See Pet. 13 n.2.

   /11/ Indeed, the testimony of respondent's own witness demonstrates
that respondent had no obligation to reimburse employees until a claim
was actually filed.  J. David Loftus, a claim administrator for Aetna,
testified that respondent's plan generally provided time limits of 90
days for the filing of some claims and one year for the filing of
other claims (J.A. 130).  He further testified that claims filed
outside this time period were usually processed in normal fashion if
filed within two years of the medical treatment, but that claims filed
later were usually questioned (J.A. 130-131).  Mr. Loftus stated that,
even in the case of extremely tardy claims, the company would
sometimes "waiv(e) our right to deny (the) claims" (J.A. 131).  But
regardless whether respondent was so generous as to make payment in
the face of such untimeliness, its recognition that payment in these
circumstances was a waiver of its "right to deny" the claims is flatly
inconsistent with its contention here that it was bound by an
unconditional obligation to pay as soon as an employee received
medical services.

   /12/ The record in fact refutes the Claims Court's statement that
processing of claims was "ministerial." Many claims, of course, were
paid by respondent without dispute, but the direct testimony of
respondent's own witness gave examples of "gray areas" in which
special processing and investigation by supervisors would be necessary
in order for respondent to determine its view as to what the proper
amount of reimbursement would be.  See, e.g., J.A. 134.  Indeed, one
of the principles of Prudential's "claim philosophy," which was put
forth by respondent as illustrative of how its plan was administered,
is that "(a)ny questionable claim will be thoroughly investigated and
fully documented before a decision is made" (J.A. 177).  Respondent's
reliance (Br. in Opp. 6-7) on the fact that relatively few lawsuits
were filed in connection with its health plans, as compared with the
number of claims filed, is quite misplaced.  Most health insurance
claims involve relatively small sums that would not warrant the
expense of litigation.  The number of lawsuits gives no indication at
all of how many of respondent's determinations were disputed by
employees, successfully or unsuccessfully, at the administrative
level.  It is well settled, of course, that a liability can be
"contested," and therefore contingent for accrual purposes, without
the filing of a lawsuit.  See Treas. Reg. Section 1.461-2(b)(2);
Dixie Pine Co. v. Commissioner, supra.

   /13/ If the employee's filing of a claim, rather than respondent's
processing and approval of the claim, were held to be the "last event"
necessary to fix respondent's obligation to pay reimbursement, there
would still be no basis on the record in this case to allow respondent
to deduct any portion of its IBNR reserve.  In constructing that
reserve, respondent made no reference to employees' actual receipt of
medical services, or to employees' actual filing of claims, during
1972.  Rather, respondent used statistics from prior years that showed
the aggregate amount of claims typically paid and the average "lag
time" between employees' receipt of services and the insurers' tender
of reimbursement.  Given this mode of construction, it would be no
easy matter to "break down" respondent's 1972 year-end IBNR balance
into two components, one reflecting its potential liability on claims
not yet filed, the other reflecting its potential liability on claims
filed but not yet processed.  In any event, respondent had the burden
of proving its entitlement to a deduction (Helvering v. Taylor, 293
U.S. 507, 514-515 (1935)), and, as we have noted above (page 6,
supra), respondent introduced no evidence that would permit its IBNR
balance to be broken down in this way.  It does appear, however, that
the bulk of the reserve represents potential liability on claims not
filed, since respondents advises (Br. in Opp. 5) that most of its
employees' claims are processed "expeditiously."

   /14/ Several lower court decisions also illustrate this basic
principle that underlies the "all events" test.  For example, in
Trinity Construction Co. v. United States, 424 F.2d 302 (5th Cir.
1970), the court held that an accrual-basis taxpayer could not take a
current deduction for future life insurance premiums that it was
already contractually obligated to pay on behalf of its employees.
Because the payments would not actually be made if the employee died
before the premium was due, the obligation was not sufficiently
certain to justify accrual.  See also Bennett Paper Corp. v.
Commissioner, 699 F.2d 450 (8th Cir. 1983) (contractual obligation
under profit-sharing plan to pay bonuses in future years);  World
Airways, Inc. v. Commissioner, 62 T.C. 786 (1974), aff'd, 564 F.2d 886
(9th Cir. 1977) (contractual obligation to make future payments for
statutorily-required engine overhauls).

   In seeking to justify its expansive reading of the "all events"
test, the Claims Court relied in part (Pet. App. 13a) upon a line of
Ninth Circuit cases culminating in Kaiser Steel Corp. v. United
States, 717 F.2d 1304 (1983).  In Kaiser Steel, the Ninth Circuit held
that an employer's obligation to make workers' compensation payments
became "fixed" once the worker had been injured and the employer had
either been found to be liable or had determined not to contest its
liability;  the Claims Court concluded that Kaiser Steel stood for the
proposition that "the fact of injury establishes the fact of
liability" (Pet. App. 13a (emphasis in original)).  We believe that
Kaiser Steel is distinguishable from the instant case in several
respects.  In Kaiser Steel, the following critical events had occurred
before the close of the tax year:  the employee had in fact been
injured;  the employee had actually filed a claim for workers'
compensation benefits;  and the employer had conceded liability on
that claim.  In the present case, by contrast, respondent as of the
close of the tax year had no way of knowing whether any employees had
in fact received medical services;  the employees in any event had not
filed claims for benefits;  and respondent reserved the right to deny
each claim in whole or in part.  Although we believe that Kaiser Steel
is fairly distinguishable on these grounds, we are frank to admit that
we believe that the case was wrongly decided.  Contrary to the Ninth
Circuit's view, the employer's obligation to pay was still contingent
on the extent of the injured worker's future medical treatment, the
duration of his disability, and other variables that could not be
known until after the close of the taxable year.  We note that
Congress in 1984 specifically overturned the result in Kaiser Steel,
providing that workers' compensation payments cannot be deducted until
"economic performance" occurs, that is, until "payments to (the
injured worker) are made." I.R.C. Section 461(h)(2)(C)(i);  see note
9, supra.  The discussion of this amendment in the legislative
history, entitled "Premature Accruals," criticized the Kaiser Steel
line of cases as allowing "overstated deductions." H.R. Rep. 98-432,
98th Cong., 2d Sess. Pt. II, at 1252-1255 (1984).

   /15/ In so holding, the Seventh Circuit relied heavily on a case
that it viewed as "directly on point," Ocean Accident & Guarantee
Corp. v. Commissioner, 47 F.2d 582 (2d Cir. 1931).  But the court
overlooked the crucial difference between Ocean Accident and the case
before it, viz., that the former involved an insurance company, which
Congress has specifically permitted to deduct reserves.  See pages
21-29, supra.