Rev. Rul. 57-485

Advice has been requested as to the extent of the deductibility, for Federal income tax purposes, of personal injury claims under the circumstances described below.

Settlement payments were made by a corporation of certain suits for personal injuries brought against it. As of the end of the same taxable year, other suits of a like kind were pending. The aggregate amount of the claims in such suits was larger than that of the payments of the suits settled in the same taxable year. Experience data for the industry, of which the taxpayer is a member, disclose that the ratio of the settlement payments of such type of claims is one percent of the corporation's gross receipts. The corporation is a self-insurer against such claims and employs the accrual method of accounting in computing net income. The question presented is whether an expense accrual for personal injury claims, to the extent of one per cent of the corporation's gross receipts, the amount of which accrual exceeds the actual payments made during the year in settlement of claims of the same type, constitutes an allowable deduction from gross income.

Dependent upon the method of accounting employed, a payment, or a definite, fixed liability incurred for payment, of personal injury claims constitutes a business expense deductible from gross income under the provisions of section 162(a) of the Internal Revenue Code of 1954. However, where anticipation is made of an expense, with corresponding provision therefor in the taxpayer's books of account as a reduction of net income, but the identifiable event giving rise to such expense has not occurred during that accounting period, no matter how likely the expense is expected to occur thereafter, such entry would cover only a contingent expense and, as such, does not constitute an allowable deduction for Federal income tax purposes. See Lucas v. American Code Co., Inc. , 280 U.S. 455, Ct. D. 168, C.B. IX-1, 314 (1930); Arthur M. Brown v. Helvering , 291 U.S. 193, Ct. D. 786, C.B. XIII-1, 223 (1934); and Lane Construction Corp. , v. Commissioner , 4 B.T.A. 1133.

Accordingly, an expense accrual of the anticipated payments of personal injury claims pending at the end of the taxable year, any liability for which claims is contingent rather than actual, does not constitute an allowable deduction for Federal income tax purposes.