Ford Motor Co. v. Commissioner
United States Court of Appeals for the Sixth Circuit
71 F.3d 209 (1995)
Ford (plaintiff) settled a series of tort claims requiring periodic payments over terms of at least 40 years, some for the recipients' lifetimes, and purchased matching annuity contracts to fund those payments while reporting the annuity income it received. In 1980, Ford deducted the entire present value of all future settlement payments at once under accrual accounting, using average life expectancies for lifetime-payment obligations, even though the payments themselves would stretch out for decades. The IRS (defendant) determined this accrual method didn't clearly reflect Ford's actual income, disallowed the deductions beyond Ford's matching annuity income, and imposed a different method limiting Ford's deduction to its actual annuity payments each year; the Tax Court affirmed the IRS, and Ford appealed.
Whether the IRS can disallow a filer's tax deductions based on otherwise proper accrual-based accounting if the method does not clearly reflect the filer's income.