Buckeye International, Inc. v. Commissioner
| Citation | 1984 TC Memo 668,49 TCM (CCH) 376 |
| Decision Date | 27 December 1984 |
| Docket Number | Docket No. 25316-82. |
| Parties | Buckeye International, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
William W. Ellis, Jr., 52 E. Gay St., Columbus, Ohio, and Aaron P. Rosenfeld, for the petitioner. Mary Helen Weber, for the respondent.
COHEN, Judge: Respondent determined the following deficiencies in petitioner's Federal income tax:
Year Deficiency
1974 ............. $ 41,112
1975 ............. 210,667
1976 ............. 30,711
1977 ............. 10,401
Respondent filed an amendment to his answer in which he determined an additional deficiency for the year 1976 in the amount of $9,716.64. After concessions by petitioner, the sole issue for decision is whether petitioner may deduct certain accrued workers' compensation liabilities in the years 1975, 1976, 1977, and 1978.1
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner is a corporation and had its principal office in Worthington, Ohio, at the time it filed its petition herein. It filed income tax returns for the years 1975, 1976, 1977, and 1978 with the Internal Revenue Service Center in Cincinnati, Ohio.
Petitioner manufactured steel castings and plastic parts for the automotive industry. During each of the years in issue, petitioner reported its income on the calendar year and utilized the accrual method of accounting.
Petitioner was an employer subject to the Ohio Workers' Compensation Law, Ohio Rev. Code Ann. ch. 4123 (Page 1980). As a "self-insured" employer, petitioner paid the bi-weekly compensation provided under the Ohio statute directly to its employees who were injured and the dependent spouses and children of its employees who were killed in the course of employment.
Petitioner contracted with several insurance companies to limit its liability as a self-insured employer. Depending on the year of employee injury, these contracts indemnified petitioner from liability in excess of either $50,000 or $100,000 per employee as the result of any single event or disaster.
During the years in issue, the Watson-Hill Company (Watson-Hill), an actuarial consultant, administered petitioner's self-insurance workers' compensation program. Watson-Hill's duties included reporting to and representing petitioner before the Ohio Industrial Commission (hereinafter sometimes referred to as the Industrial Commission or the Commission), which administers the state workers' compensation law, paying claims, and reporting back to petitioner.
Watson-Hill also estimated the amount of petitioner's liability for workers' compensation payments. Watson-Hill determined the expected payments to each employee that the Industrial Commission declared to be permanently and totally disabled by multiplying the annual compensation ordered by the Commission by the employee's remaining life expectancy in years. For a surviving spouse, Watson-Hill multiplied the annual compensation ordered by the Commission by the remaining life expectancy of the spouse. In computing expected payments to a dependent child, Watson-Hill multiplied the ordered compensation by the number of years remaining until the child's 18th birthday. Where petitioner was entitled to a partial refund from the state insurance fund because a pre-existing disease or condition contributed toward the employee's injury or death, Watson-Hill reduced the expected payments by the percentage of each payment that the state had agreed to reimburse petitioner.
To determine the remaining life expectancies of injured employees and surviving spouses, Watson-Hill utilized the Commissioners 1958 Standard Ordinary Mortality Table (1958 CSO). Compiled by the insurance carrier industry, the 1958 CSO was based upon the length of life of life insurance policy holders and was commonly used to determine life insurance premiums.
On its income tax returns for the years in issue, petitioner deducted accrued liabilities for workers' compensation payments to permanently and totally disabled employees and the dependents of deceased employees. The amount deducted with respect to each employee equaled the lesser of Watson-Hill's estimate of petitioner's unreimbursed liability or petitioner's maximum remaining liability under the various insurance arrangements. With respect to all but two employees, this latter figure was lower than petitioner's initial uninsured liability because of payments made by petitioner prior to accrual.
Petitioner also claimed a deduction with respect to one employee who was only partially disabled. Petitioner concedes on brief that such deduction was excessive.
With one exception, petitioner reported the deductions in the year in which the Industrial Commission issued its orders. In the one exceptional case, petitioner deducted the accrued liability upon petitioner's agreement to make payments to an employee without a determination by the Commission.
With respect to two employees, petitioner contested the Commission's orders through state court mandamus actions in subsequent years. Petitioner now concedes that accruing deductions with respect to these two employees while contesting its liability was improper.
Respondent determined that petitioner's liability to make workers' compensation payments to permanently and totally disabled employees and the dependents of deceased employees was contingent upon the happening of future events and that the amount of the liability could not be determined with reasonable accuracy. He therefore denied petitioner's accruals in full. The adjustments to petitioner's taxable income in respondent's statutory notice of deficiency equaled the difference between the amount accrued each year by petitioner and denied by respondent and the amount the Revenue Agent believed petitioner actually paid to the employees and their dependents in that year.
The following table lists, according to the year of deduction, each employee with respect to whom petitioner accrued a deduction that remains in issue; Watson-Hill's estimate of petitioner's unreimbursed liability to each employee; the related maximum remaining liability of petitioner under the insurance arrangements; and the amount actually deducted by petitioner.
Maximum
Employee Watson-Hill Liability
Estimate With Insurance Deduction
___________________________________________________________________________________________
1975
William Powers ............ $ 33,103 $50,000 $ 33,103
Claude Thompson ........... 6,831 50,000 6,831
John Bester ............... 95,458 24,851 24,851
Hazel Morton .............. 9,750 44,377 9,750
Joe Carroll ............... 117,470 33,618 33,618
Charles McDowall .......... 68,304 31,027 31,027
William Smith ............. 7,263 92,737 7,263
Billy Stiffler ............ 188,177 84,122 84,122
Wayne Neff ................ 101,978 88,360 88,360
________ ________
Totals .................. $628,334 $318,925
1976
Charles Salyer ............ $ 29,081 $87,812 $ 29,081
Stewart Preece ............ 93,708 34,124 34,124
William Caldwell .......... 205,530 91,972 91,972
William Stafford2 .... 41,531 91,945 41,531
________ ________
Totals .................. $369,850 $196,708
1977
Francis Leonard ............ $146,906 $25,606 $ 25,606
William Stafford2 ..... 328,557 91,945 48,698
________ ________
Totals .................. $475,463 $ 74,304
1978
Luther Bean ................ $ 87,498 $83,509 $ 60,509
Leroy Wiggins .............. 30,107 45,007 31,854
Leroy Wiggins3 ........ 115,728 83,078 40,540
________ ________
Totals .................. $233,333 $132,903
___________________________________________________________________________________________
All events that determined the fact of petitioner's liability to make workers' compensation payments with respect to the above employees had occurred in the years in which petitioner reported the deductions.
The amount of petitioner's liability was determinable with reasonable accuracy in the years in which petitioner reported the deductions.
OpinionBoth petitioner and respondent agree that workers' compensation payments to permanently and totally disabled employees and the dependents of deceased employees are ordinary and necessary expenses in carrying on a trade or business, deductible under section 162.4 The issue before us is when such payments are deductible — in the year in which the Ohio Industrial Commission ordered petitioner to make the statutory payments or in the year in which petitioner actually makes the payments.
Section 461(a) requires that a taxpayer report a deduction in the taxable year that is...
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