                        T.C. Memo. 2000-283



                      UNITED STATES TAX COURT



 CHRYSLER CORPORATION, F.K.A. CHRYSLER HOLDING CORPORATION, AS
  SUCCESSOR BY MERGER TO CHRYSLER MOTORS CORPORATION AND ITS
            CONSOLIDATED SUBSIDIARIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No.   22148-97.           Filed August 31, 2000.



     James P. Fuller, Ronald B. Schrotenboer, Kenneth B. Clark,

James C. Garahan, and Laura K. Zeigler, for petitioner.

     Robin L. Herrell and Nancy B. Herbert, for respondent.



                        MEMORANDUM OPINION


     LARO, Judge:   Respondent moves the Court for partial summary

judgment.   See Rule 121.1    Respondent determined deficiencies in

petitioner’s 1983, 1984, and 1985 Federal income taxes in the

     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 2 -

amounts of $593,967, $13,064,705 and $36,102,409, respectively.

In relevant part, respondent determined that petitioner could not

accrue a deduction of its estimated lifetime warranty expenses,

or a part thereof, for vehicles that were sold during the

corresponding year.

     We must decide whether for Federal income tax purposes all

events necessary to determine petitioner’s liability for its

warranty expenses have occurred when it sells its vehicles to its

dealers; in other words, has petitioner satisfied the first prong

of the all events test entitling it to deduct its estimated

future warranty costs on the sale of such vehicles?    We hold that

it has not.

     The following statement of the background of this case is

based on the parties’ joint statement of undisputed and disputed

facts, stipulation of facts--warranty issue, and attached

exhibits.

                            Background

     Petitioner’s principal place of business was located in

Auburn Hills, Michigan, when the petition was filed.   Petitioner

keeps its books and computes its income for financial purposes

and for Federal income tax purposes using the accrual method of

accounting.   It uses a calendar year as its taxable year.

     Petitioner manufactures and sells automobiles and trucks

(vehicles).   Petitioner generally sells the manufactured vehicles

to dealers, who resell the vehicles to retail customers.     A sale
                               - 3 -

generally occurs when a vehicle is delivered to the carrier for

shipment to the dealer, at which time title passes from

petitioner to the dealer.

     Petitioner provides written manufacturer's warranties to the

retail purchasers of its new vehicles.   These warranties inform

purchasers that the scope of the written warranty covers defects

in their vehicles, provided that the defects occur during normal

use and within specified warranty periods.   The written

warranties provide in part that petitioner will provide repair or

replacement of defective parts or workmanship without charge.

     Generally, the written warranties are of two types, basic

warranties and extended warranties.    Basic warranties typically

provide coverage for 1 year from the warranty starting date (the

date of original retail delivery or original use, whichever

occurs first).   Extended warranties generally take effect when

the basic warranty has expired.    Petitioner's extended warranties

frequently are valid for 5 years from the warranty starting date

or until the vehicle has 50,000 miles, whichever occurs first.

In some instances the extended warranties have shorter periods,

such as 24 months or 24,000 miles.

     Before petitioner can provide the warranty service required,

the owner of a vehicle has to return the vehicle for service,

generally to the selling dealer.   Petitioner’s dealers perform

the service and then make a claim on petitioner for

reimbursement.   In the event the vehicle owner is traveling or
                                 - 4 -

has moved, the written warranties require the owner to seek

warranty service from any Chrysler Corp. dealer selling the same

make of vehicle.     The warranties for model years 1981 through

1986 direct the owner to contact the nearest Chrysler Corp.

dealer if failure of a warranted part necessitates emergency

service.

     The warranties, in part, set forth procedures an owner could

follow if unsatisfied with the dealer's response to the request

for warranty service.    The owner can choose to discuss the matter

with the selling dealer's management, the Customer Relations

Department in the nearest Chrysler Zone Office, and/or Chrysler's

Customer Relations Department in Detroit.    For model years 1982

through 1986, the written warranties added that the owner could,

in some cases, take the matter to a Chrysler Corp. Customer

Satisfaction Board, and in other cases, to the Customer

Arbitration Board.

     The written vehicle warranties do not cover all problems

that might arise with the vehicle during the applicable warranty

periods.   Coverage of repairs required as a result of fire,

accident, abuse or negligence, failure to properly operate the

vehicle, or alterations of the vehicle not recommended or

approved by petitioner are expressly excluded.     Also, expressly

excluded are repairs required due to lack of maintenance or

improper maintenance.    The warranties, for model years 1981

through 1986, do not cover damage from the environment, such as
                                - 5 -

damage from airborne fallout, chemicals, tree sap, salt, road

hazards, hail, windstorms, lightning, floods, and other acts of

God.    In the warranties for all model years, coverage is excluded

for any vehicle which has an altered odometer reading.

       In addition to the express contractual provisions of

petitioner’s written warranties, petitioner is obligated to

comply with certain implied warranty provisions mandated by

Federal and State statutes.    The statutes applicable include the

Magnuson-Moss Federal Warranty Act, 15 U.S.C. secs. 2301-2312

(1994), the Clean Air Act of 1970, 42 U.S.C. secs. 7521(d),

7541(a) (1994), the FTC Act, 15 U.S.C. sec 41 (1994), and the

Uniform Commercial Code (as adopted by various States) and State

“lemon laws”.    State “lemon laws” typically provide that if the

manufacturer cannot fix the defective part to conform to the

express warranty after a “reasonable number of attempts”, and the

nonconformity “substantially impairs” the vehicle’s value or use,

the manufacturer must replace the vehicle or refund the purchase

price.

       Petitioner enters into written agreements with its dealers

requiring them to correct conditions covered by petitioner's

warranties.    In order to obtain reimbursement from petitioner,

the agreements require the dealers to submit claims after

repairs.    Petitioner reimburses the dealers for providing

warranty service, provided that the dealers performed and

recorded the services as outlined in petitioner's Warranty Policy
                                - 6 -

& Procedure Manual (warranty manual) and submitted valid warranty

claims.

     The warranty manual provides detailed instructions to

petitioner’s dealers which guide them in the administration of

petitioner’s warranty liabilities.      It also contains the

procedures for obtaining reimbursement for providing warranty

service.    The warranty manual requires dealers to obtain

authorization before proceeding with certain warranty repairs.

It also provides an appeal procedure for dealers to appeal claims

when petitioner has paid less than the full amount of the claim

or refused to pay.

     In certain circumstances, the warranty manual requires

dealers to return defective parts or materials to petitioner.

The warranty manual warns dealers that petitioner has adjusted,

denied, or charged back to the dealers a significant number of

claims because improper packaging of the returned parts resulted

in missing or mutilated material and/or claims.

     Petitioner's corporate internal audit department

periodically reviews warranty payments to dealers.      These reviews

sometimes result in petitioner’s determining that the dealers

have received warranty cost reimbursements to which they are not

entitled.    Petitioner charges the dealers for the amounts of such

reimbursements.

                             Discussion

     Whether a business expense has been "incurred" so as to
                               - 7 -

entitle an accrual-basis taxpayer to deduct it under section

162(a) is governed by the “all events” test as set out in United

States v. Anderson, 269 U.S. 422, 441 (1926).   In Anderson, the

Supreme Court held that a taxpayer was entitled to deduct from

its 1916 income a tax on profits from munitions sales that took

place in 1916.   Although the tax would not be assessed and

therefore would not formally be due until 1917, all the events

had occurred in 1916 to fix the amount of the tax and to

determine the taxpayer's liability to pay it.   The all events

test is now embodied in section 1.461-1(a)(2), Income Tax Regs.,

which provides: “Under an accrual method of accounting, an

expense is deductible for the taxable year in which all the

events have occurred which determine the fact of the liability

and the amount thereof can be determined with reasonable

accuracy.”2   See United States v. General Dynamics Corp., 481

U.S. 239, 242-243 (1987).

     Thus, under the regulations, the all events test has two

prongs, each of which must be satisfied before accrual of an


     2
      While it is not relevant to our decision of whether or not
the first prong of the all events test has been met, we note that
the enactment of sec. 461(h)(1) provides that the all events test
shall not be treated as met any earlier than when economic
performance occurs. Under sec. 461(h), not only must both prongs
of the all events test be met, but, additionally, economic
performance must have occurred. Generally sec. 461(h) applies
“to liabilities that would, under the law in effect before the
enactment of section 461(h), be allowable as a deduction or
otherwise incurred after July 18, 1984.” Sec. 1.461-4(k), Income
Tax Regs.
                                 - 8 -

expense is proper.   First, all the events must have occurred

which establish the fact of the liability.   Second, the amount

must be capable of being determined “with reasonable accuracy.”

Sec. 1.461-1(a)(2), Income Tax Regs. (accrual of deductions);

sec. 1.446-1(c)(1)(ii), Income Tax Regs. (accrual in general).

For the purpose of deciding this motion, only the first prong of

the test is relevant.   For the purpose of the first prong of the

test the Supreme Court has stated that the liability must be

“final and definite in amount”, Security Flour Mills Co. v.

Commissioner, 321 U.S. 281, 287 (1944), “fixed and absolute”,

Brown v. Helvering, 291 U.S. 193, 201 (1934), in order to be

deductible.   See also Helvering v. Russian Fin. & Constr. Corp.,

77 F.2d 324, 327 (2d Cir. 1935) (“The existence of an absolute

liability is necessary; absolute certainty that it will be

discharged by payment is not.”), affg. a Memorandum Opinion of

this Court.

     Petitioner's deductions for anticipated warranty expenses in

1984 and 1985 were based on the theory that the last event

necessary to establish petitioner's warranty liability was the

sale of a vehicle to a dealer.    Petitioner argues that the issue

we must decide “properly formulated, is whether Respondent has

established with a sufficient record of undisputed facts that he

is entitled to judgment as a matter of law that all events have

not occurred by the end of the 1984 and 1985 taxable years,

respectively, that determine the fact of Petitioner’s warranty
                                - 9 -

liability.”

     Respondent bears the burden of proving his entitlement to a

partial summary judgment.   See Rule 121(b); Jacklin v.

Commissioner, 79 T.C. 340, 344 (1982).   The factual materials

presented and the inferences therefrom must be viewed in the

light most favorable to the party opposing the motion.    See

Adickes v. Kress & Co., 398 U.S. 144, 157 (1970); United States

v. Diebold, Inc., 369 U.S. 654, 655 (1962).   Petitioner argues

respondent has not provided either evidence or explanation that

shows petitioner’s statutory warranty liabilities are not fixed

by statutes, such as the U.C.C., Magnuson-Moss, and State “lemon

laws”.   Petitioner places reliance on United States v. Hughes

Properties, Inc., 476 U.S. 593 (1986), for the proposition that

statutory liabilities satisfy the first prong of the all events

test.    Petitioner states: “It is well settled that if a liability

is fixed by statute, it is fixed under the first prong of the All

Events Test.”3   We find petitioner’s reliance on United States v.

Hughes Properties, Inc., supra, and other cases4 cited to be



     Petitioner uses the term “statutory liability” to refer to
     3

liabilities arising from statutes or regulations promulgated
pursuant to a statute.
     4
      Petitioner also cites: United States v. Anderson, 269 U.S.
422 (1926) (involved a statutory liability that arose upon the
profitable sale of munitions); Kaiser Steel Corp. v. United
States, 717 F.2d 1304 (9th Cir. 1983); Wien Consol. Airlines,
Inc. v. Commissioner, 528 F.2d 735 (9th Cir. 1976), affg. 60 T.C.
13 (1973); Denise Coal Co. v. Commissioner, 271 F.2d 930 (3d Cir.
1959), revg. 29 T.C. 528 (1957); Exxon Mobil Corp. v.
Commissioner, 114 T.C. 293 (2000) (a portion of the liability
fixed by State regulations met the first prong); Ohio River
                                                   (continued...)
                              - 10 -

misplaced.

     In Hughes Properties, the taxpayer was a Nevada casino that

was required by State statute to pay as a jackpot a certain

percentage of the amounts gambled in progressive slot machines.

The taxpayer was required to keep a cash reserve sufficient to

pay the guaranteed jackpots when won.     Hughes Properties at the

conclusion of each fiscal year entered the total of the

progressive jackpot amounts (shown on the payoff indicators) as

an accrued liability on its books.     From that total, it

subtracted the corresponding figure for the preceding year to

produce the current tax year's increase in accrued liability.     On

its Federal income tax return this net figure was asserted to be

an ordinary and necessary business expense and deductible under

section 162(a).   The Court found that the all events test had

been satisfied and the taxpayer was entitled to the deduction.

The Court reasoned that the State statute made the amount shown

on the payout indicators incapable of being reduced.     Therefore

the event creating liability was the last play of the machine

before the end of the fiscal year, and that event occurred during

the taxable year.

     We conclude that the cases cited by petitioner do not

strictly stand for the proposition that if a liability is fixed

     4
      (...continued)
Collieries Co. v. Commissioner, 77 T.C. 1369 (1981) (Court
reviewed); Buckeye Intl., Inc. v. Commissioner, T.C. Memo.
1984-668.
                               - 11 -

by statute, that fact alone meets the first prong of the all

events test.    Rather we are of the opinion that the first prong

of the all events test may be met when a statute has the effect

of irrevocably setting aside a specific amount, as if it were to

be put into an escrow account, by the close of the tax year and

to be paid at a future date.    In the instant case, the applicable

statutes do not so provide.

     Respondent relies on the analysis contained in the Supreme

Court's opinion in United States v. General Dynamics Corp., 481

U.S. 239 (1987).    In General Dynamics, the taxpayer, who self-

insured its employee medical plan, deducted estimated costs of

medical care under the plan.   The employer's liability was

determinable.   The employees' medical needs had manifested

themselves, employees had determined to obtain treatment, and

treatment had occurred.    The only events that had not occurred

were the employees’ filing claims for reimbursement before the

end of the taxable year.   The Supreme Court found that the all

events test was not met until the filing of properly documented

claims.   The filing of the claim was the last event needed to

create the liability and therefore absolutely fix the taxpayer's

liability under the first prong of the all events test.   See id.

at 244.

     Petitioner focuses on the fact that the liability in United

States v. Hughes Properties, Inc., supra, was in part fixed by

operation of statute and concludes from that that the first prong
                                - 12 -

of the all events test is satisfied if a statute in part works to

fix the liability.   We do not agree.    In both Hughes Properties

and General Dynamics the Supreme Court focused on the last event

that created the liability.    In Hughes Properties the event

creating liability was the last play of the machine before the

end of the fiscal year.    Because the Nevada statute fixed the

amount of the irrevocable payout, that play crystalized or fixed

absolutely the taxpayer’s liability, thus satisfying the first

prong of the all events test.    In General Dynamics, the last

event that created the liability was the employee filing the

claim for reimbursement.

     We are unable to find sufficient differences between the

facts in General Dynamics and those of the instant case to

justify departing from the Supreme Court’s analysis.    Here, as in

General Dynamics, the last event fixing liability does not occur

before the presenting of a claim, either a claim for warranty

service by the customer through one of petitioner’s dealers or a

claim for reimbursement made on petitioner by the dealer.

     The Supreme Court stated:

     It is fundamental to the "all events" test that,
     although expenses may be deductible before they have
     become due and payable, liability must first be firmly
     established.   This is consistent with our prior
     holdings that a taxpayer may not deduct a liability
     that is contingent, see Lucas v. American Code Co., 280
     U.S. 445, 452, (1930), or contested, see Security Flour
     Mills Co. v. Commissioner of Internal Revenue, 321 U.S.
     281, 284, (1944).   Nor may a taxpayer deduct an
     estimate of an anticipated expense, no matter how
     statistically certain, if it is based on events that
                                 - 13 -

     have not occurred by the close of the taxable year.
     Brown v. Helvering, 291 U.S. 193, (1934); cf. American
     Automobile Assn. v. United States, 367 U.S. 687, 693,
     (1961). [Id. at 243-244; emphasis added.]


     Prior to the Supreme Court’s decision in Hughes Properties,

but consistent with its reasoning, this Court in World Airways v.

Commissioner, 62 T.C. 786 (1974), affd. 564 F.2d 886 (9th Cir.

1977), found that a statutory liability by itself was

insufficient to fix liability for the purposes of the all events

test.   The Court found it was not the statute acting alone that

caused the liability.    In that case the taxpayer was statutorily

required to overhaul its aircraft after specified numbers of

flight hours.     The Court refused to allow deduction of a portion

of the anticipated overhaul costs corresponding to the amount of

flight hours logged in the taxable year, as “Petitioner was under

no obligation to make any payment unless an overhaul was actually

performed."     Id. at 802.   Only if the taxpayer continued to use

the aircraft would the point at which overhaul was required be

reached.   While the Court found that the possibility the aircraft

might crash or be grounded was perhaps remote, it recognized the

more substantial possibility that the taxpayer's use of the

aircraft could be cut short because of a sale of the aircraft.

See id. at 804.    In contrast to Hughes Properties, the statute

did not require the equivalent of setting aside a specific

reserve fund based on the hours flown during the fiscal year.

Thus even assuming, arguendo, that the basis of part of
                                 - 14 -

petitioner’s liability was fixed by statute,5 that fact alone is

insufficient to satisfy the first prong of the all events test.

     In the instant case we do not find it necessary to determine

the exact point in time when the first prong of the all events

test would be met.      For respondent to prevail on his motion it is

necessary only that we determine that the first prong of the all

events test has not been met when the vehicles are sold to the

dealers.   We hold, as was the case in United States v. General

Dynamics Corp., supra, the last event in the fixing of liability

occurs no sooner than when a claim is filed with petitioner by

one of its dealers or by the retail customer.     In light of the

decision in General Dynamics, we find unpersuasive petitioner’s

arguments that the partial statutory nature of its warranty

liability fixes the liability for warranty on the date of sale.

We also find that there are no genuine issues as to any material

fact.    Accordingly,



                                       An appropriate order will be

                                  issued granting respondent’s motion

                                  for partial summary judgment.



     5
      For example, petitioner relies on liability being fixed by
operation of U.C.C. sec. 2-725(2). Under U.C.C. sec. 2-725(2),
1B U.L.A. 587 (1989), “A cause of action accrues when the breach
occurs, regardless of the aggrieved party's lack of knowledge of
the breach. A breach of warranty occurs when tender of delivery
is made”.
