59 T.C. 751">*752 The Commissioner determined the following deficiencies in petitioner's income tax:

The only issue remaining for decision is whether an accrual basis taxpayer, a self-insurer of a portion of its Federal and State workmen's compensation liability, was entitled to deductions in the years 1964, 1965, and 1966 in respect of estimated amounts of such liability not payable until years subsequent to each of the respective tax years.

FINDINGS OF FACT

The parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference.

Crescent Wharf & Warehouse Co. ("petitioner," "Crescent," or "the corporation") is a California corporation. Its Federal corporate income tax returns for each of the years 1962, 1964, 1965, and 1966 were prepared on the accrual basis and filed with the district director of internal revenue at Los Angeles, Calif. At the time its original and amended petitions herein were filed, the corporation's principal offices were in Wilmington, Calif.

During the years 1964 through 19661973 U.S. Tax Ct. LEXIS 164">*166 Crescent was engaged in the business of providing stevedoring, terminal, and warehousing services to ocean-going vessels at the ports of Los Angeles, Long Beach, and San Diego. It was then subject to the Workmen's Compensation and Insurance provisions of the California Labor Code (West 1971), sec. 3201 et seq., and the Federal Longshoremen's and Harbor Workers' Compensation Act, ch. 509, 44 Stat. 1424, codified in 33 U.S.C. sec. 901 et seq. (1970). Under those provisions the corporation was required to compensate its employees for certain injuries suffered by them in the course of their employment, irrespective of the existence of negligence on its part. The Federal statute was applicable only in certain cases where "recovery for the disability or death through workmen's compensation proceedings may not validly be provided by State law." 33 U.S.C. sec. 903(a).

59 T.C. 751">*753 Both the California and Federal statutes required every employer to secure the payment of workmen's compensation through insurance, either with an approved commercial insurance company, or pursuant to governmental authorization, by self-insurance. 1973 U.S. Tax Ct. LEXIS 164">*167 For a number of years Crescent had been fully insured against its workmen's compensation liability by Pacific Employers Insurance Co., and it had deducted the amounts of its premium payments to that company on its respective tax returns for the years in which the payments were made. Beginning on July 14, 1964, the corporation became a self-insurer of part of its workmen's compensation liability. Under the program thus instituted, Crescent provided self-insurance for the first $ 25,000 of each claim and carried outside insurance for the remainder of its workmen's compensation liability. The corporation maintained on its books and records an account entitled "Reserve for Open Cases" which included amounts pertaining to its anticipated liability in respect of its workmen's compensation obligations, and it claimed income tax deductions for additions to that reserve, as more fully described hereinafter. The Commissioner determined that the net additions, which represented estimated payments due only in subsequent years, constituted contingent liabilities that were not fixed and accruable in the taxable year.

Under both Federal and California law, Crescent was required to provide its1973 U.S. Tax Ct. LEXIS 164">*168 injured employees, or their representatives, with three kinds of workmen's compensation benefits: (1) necessary medical treatment, or reimbursement for the costs of such treatment; (2) disability payments; and (3) death benefits. The payments for medical costs represented the highest expenditure under the workmen's compensation program. The Federal statute provided that medical treatment was to be furnished "for such period as the nature of the injury or the process of recovery may require." 33 U.S.C. sec. 907(a). California law required the provision of such treatment as "is reasonably required to cure or relieve from the effects of the injury." Cal. Labor Code sec. 4600. Crescent's liability for the full cost of providing medical services to an injured employee thus did not always become fixed at the time of injury; rather, it became fixed only at such times as the employee actually received the required medical care.

The disability payments and death benefits provided for by both statutes (hereinafter sometimes referred to together as "indemnity payments" or "indemnity awards") were generally designed to compensate employees, or their surviving1973 U.S. Tax Ct. LEXIS 164">*169 dependents, for the loss in wage-earning capacity resulting from on-the-job injuries. The amounts of all disability payments, and the amounts of death benefits payable under Federal law, were therefore based on the employee's level of compensation prior to his injury. California death benefits, however, 59 T.C. 751">*754 were generally payable in fixed sums provided by statute. Determinations of the amounts of indemnity awards were made pursuant to prescribed formulas but often had to take into account numerous variables not susceptible of precise measurement, e.g., extent of preexisting physical impairment, probable earning capacity during the period of disability, etc.

Indemnity payments under both statutes were generally to be periodic in nature, and in most disability cases they were to be made only "during the period of such disability" (California law) or "during the continuance" thereof (Federal law). Thus, the continuance of the disability was ordinarily a condition precedent to Crescent's liability. However, in all cases of permanent disability covered by the California statute, and in certain such cases covered by Federal law, the period during which compensation was payable1973 U.S. Tax Ct. LEXIS 164">*170 depended on the nature and extent of the impairment rather than on the continuance of the disability. But such payments, as well as death benefits for surviving dependents, were nonetheless to be paid in regular installments, just as in the case of other kinds of injuries, and in the event of a subsequent determination that the disability was not permanent the payment of future installments would be affected.

Indemnity payments thus could extend over substantial periods of time, although in certain circumstances the periodic payments could validly be terminated or a lump-sum payment might be required. Payments for medical services sometimes were made over similarly lengthy periods as such services were required by injured employees. Extended payments of the foregoing nature were not unusual in Crescent's experience, but the largest portion of its total liability to most disabled employees was paid within 2 or 3 years of the time of their injuries. The corporation's obligation to make continuing payments was cut off by special circumstances in less than 1 percent of its workmen's compensation cases.

To administer its workmen's compensation self-insurance program, Crescent retained1973 U.S. Tax Ct. LEXIS 164">*171 the services of R. L. Kautz & Co. (Kautz), a firm engaged in the business of managing similar programs on behalf of a number of California employers. Additions to Crescent's reserve or liability account were based exclusively on estimates made by Kautz in respect of the corporation's liability in each case of an injury to an employee, and Kautz was also responsible for making disbursements related to the self-insurance plan out of a special fund established by the corporation.

During the portion of 1964 for which Crescent's self-insurance program was in effect, approximately 237 of its employees suffered injuries arguably entitling them to workmen's compensation benefits. The corresponding figures for 1965 and 1966 were 548 and 502, respectively. Within a few days of each injury Crescent prepared a report 59 T.C. 751">*755 relating the circumstances surrounding the accident and certain other information in respect of the injured employee, and an examining physician made a report of his preliminary evaluation of the nature and degree of the disability. On the basis of these reports and such other information as he independently acquired, a Kautz employee determined whether Crescent was1973 U.S. Tax Ct. LEXIS 164">*172 apparently liable to the injured employee under the workmen's compensation laws and estimated the overall amount of such liability, with respect to both indemnity and medical payments. In making these estimates, Kautz employees relied upon certain rating schedules which were derived from the statutes. However, they also made a variety of subjective determinations on the basis of the Kautz firm's experience in handling workmen's compensation matters, and these were often reflected in the final estimated figures.

Except in the simplest cases, the original Kautz estimates were not precisely accurate, and they sometimes deviated by a wide margin from the amounts of payments actually made. Kautz therefore revised its estimates from time to time pursuant to improved information it received during the pendency of a given case. It was Kautz' practice to review the status of each injured employee and to reestimate Crescent's remaining liability in respect thereof at least once every 90 days.

Kautz transmitted monthly reports to Crescent listing the most recent estimates of the corporation's remaining liability to every injured employee to whom payments were still due on the date of the1973 U.S. Tax Ct. LEXIS 164">*173 report and indicating the actual medical and indemnity disbursements that had been made to each employee as of such date. Crescent reported this information on its books through a system of multiple accounts.

The net effect of the entries on the corporation's books in respect of its workmen's compensation liability was to credit a liability account, and charge a correlative expense account, for the amount of estimated liability in respect of each injured employee. These entries were first made, in each case, upon receipt of the monthly Kautz report showing that an initial estimate of liability had been made. As subsequent reports were received indicating that the original estimates had been revised, Crescent made correcting entries to both the expense and liability accounts. At times these corrections were not, and could not, be made in the same year in which the injury had occurred. Disbursements to injured employees were charged against the liability account. At such times as it appeared to Kautz that no further payments were due to a particular employee, any remaining balance in the liability account attributable to that employee was eliminated, and the expense account was1973 U.S. Tax Ct. LEXIS 164">*174 similarly adjusted.

By accounting for its workmen's compensation liability in this manner, Crescent arrived at an expense figure for each year consisting 59 T.C. 751">*756 of three elements: (1) actual disbursements in respect to injuries occurring in that year; (2) additional amounts estimated by Kautz to be due in subsequent years in respect to injuries occurring in the current year; and (3) adjustments for updated Kautz estimates relating to injuries occuring in prior years. The accrual at each yearend represented the aggregate amount of anticipated future payments on all pending claims -- whether from the current year or prior years -- as indicated on the latest Kautz report. Since these reports provided estimates of the corporation's total liability in respect to each injury, adjustments were necessary to eliminate amounts in excess of $ 25,000 on any claim, in respect of which the corporation carried outside insurance.

The transactions in Crescent's workmen's compensation liability account for the years 1964 through 1966 are summarized in the following stipulated table:

1973 U.S. Tax Ct. LEXIS 164">*175 As mentioned above, the final balances in the table above represented the aggregate estimated amounts of Crescent's remaining self-insured liability on all cases pending at each respective yearend. Although the Kautz liability predictions sometimes were substantially erroneous in respect of individual cases, the aggregate estimates were somewhat more accurate, as is shown by the following table:

1973 U.S. Tax Ct. LEXIS 164">*176 Included among the cases reflected in the foregoing table and in the amounts deducted by petitioner as accrued liabilities were a number of so-called contested cases. These were cases in which Crescent and an 59 T.C. 751">*757 injured employee, or his representatives, had been unable to agree upon Crescent's liability and which were therefore brought before the appropriate Federal or California administrative agency for adjudication. Such disputes could arise where the parties differed as to the amount properly owing to the employee or where the corporation disclaimed all liability, as it was entitled to do in special circumstances described by the statutes. Since the inception of its self-insurance program, Crescent has denied liability completely in less than five cases. The period of limitations for filing an application for adjudication with either the State or Federal agency was generally 1 year from the date of the accident. Most applications were filed shortly before the expiration of the 1-year period, and thus it was usually not known until the calendar year following the year of injury whether a case would become contested. Of the 87 employee injuries occurring in 1966 that1973 U.S. Tax Ct. LEXIS 164">*177 eventually gave rise to contested cases, only 6 were contested as of December 31, 1966.

The additions to petitioner's reserve which it claimed as deductions on its returns for each of the years 1964-66 included the estimates for contested as well as uncontested cases, as noted above. Petitioner has since modified its position, and now claims deductions only to the extent that the estimates related to the uncontested cases. However, petitioner did not separately account for contested and uncontested cases in its books and records, and its counsel presented evidence at the trial in an effort to eliminate contested cases from petitioner's ending accrual for 1966. The table below is based on such evidence and represents petitioner's comparison of the ending accrual for 1966, as adjusted to eliminate amounts relating to certain contested cases, and actual payments in subsequent years in respect of the other cases represented in the accrual. The amounts eliminated relate only to those cases that were contested as of December 31, 1966, for which the remaining estimated liability on such date was in excess of $ 2,000. Twenty-seven such cases were identified. Petitioner was unable to1973 U.S. Tax Ct. LEXIS 164">*178 construct comparable schedules in respect of the 1964 and 1965 accruals. There is no adequate explanation on the record for the discrepancy between the amount used for the total accrual in the table below ($ 482,971.52) and the ending 1966 liability figure shown in the first table above ($ 512,521.99). Both of these figures purport to include amounts attributable to both 1966 injuries and prior years' injuries. The table just described is as follows:

59 T.C. 751">*758 Actual payments in subsequent years:

The following table, also based upon data submitted by petitioner1973 U.S. Tax Ct. LEXIS 164">*179 at the trial, is comparable to the schedule above except that it pertains solely to injuries that occurred in 1966:

Actual payments in subsequent years:

Portions of the deductions for the "cost of goods sold" on Crescent's tax returns for 1964, 1965, and 1966 were attributable to its self-insured workmen's compensation program. The precise amounts thus claimed in respect of that program are not separately identified on the returns, and these amounts included the previously described annual additions to the reserve or liability account (which were charged to workmen's1973 U.S. Tax Ct. LEXIS 164">*180 compensation expense in each year) plus certain other items that are no longer in issue. The Commissioner determined that the net additions to the reserve or liability account "represented contingent liabilities not fixed and accruable in the taxable years 1964, 1965 and 1966 and are, therefore, not deductible until the liabilities are definitely ascertained." As previously noted, Crescent no longer seeks to defend the full amounts of the disallowed deductions; it now maintains only that it was entitled to deductions in respect of the portions of each year's final accrual allocable to cases not "contested" as of each yearend. The deficiency for 1962 is attributable solely to the disallowance of a carry-back of an alleged net operating loss for 1965 that resulted from Crescent's deduction of the disallowed workmen's compensation expenses.

59 T.C. 751">*759 OPINION

This case is governed by the recent decision of this Court in Thriftimart, Inc., 59 T.C. 598">59 T.C. 598, which involved a like self-insurance program also administered by the same organization, R. L. Kautz & Co. To be sure, that case involved claimed accruals in respect of both contested and uncontested employee1973 U.S. Tax Ct. LEXIS 164">*181 claims, in contrast to petitioner's efforts here to eliminate the contested claims. We need not decide whether petitioner has successfully eliminated such contested claims and thus "purified" the figures. For, Thriftimart makes clear that its reasoning applies to both types of claims.

The basic test is whether all the events have occurred during the taxable year determining the fact of liability and whether the amount thereof is ascertainable with reasonable certainty. Sec. 1.461-1(a)(2), Income Tax Regs.; cf. Dixie Pine Products Co. v. Commissioner, 320 U.S. 516">320 U.S. 516, 320 U.S. 516">519. The Court in Thriftmart held that neither of the requirements of that test was met on the record before it. We hold that petitioner herein must fail because it has not satisfied the first part of the test -- i.e., it has failed to show that "all the events" have occurred during the taxable year fixing its liability -- and we need not consider whether it has been able to make a reasonably accurate forecast of its workmen's compensation liability as of the end of each year in issue, for it is clear that failure to comply with either of the requirements of the test is fatal.

1973 U.S. Tax Ct. LEXIS 164">*182 The fallacy in petitioner's position as to the first part of the test is its assumption that the occurrence of an injury to an employee in an uncontested case is sufficient to fix its liability to that employee. The occurrence of the injury is but the first, although important, step in fixing petitioner's liability. It merely establishes the basis for the employee's claims against petitioner. In order for those claims to ripen, further events are necessary, e.g., the rendering of medical services, which may in fact occur in the subsequent year or years. Petitioner's liability matures from time to time only as such services are in fact rendered.

Although analogies are sometimes treacherous, the situation is not too far different from services rendered by an employee under an employment contract. Thus, an employer may be obligated to an employee under a 10-year contract of employment, which determines their respective rights and liabilities over the term of the contract, but the employer's liability is accruable only year by year in respect of the services rendered during each year. The reason is that until the services have been rendered, "all the events" have not occurred that1973 U.S. Tax Ct. LEXIS 164">*183 would justify an accrual. The present case is similar. Although the employee's injury establishes the underlying basis of liability, further "events" are necessary before that liability may be accrued. As already 59 T.C. 751">*760 noted, until medical services are rendered, there can be no existing liability in respect thereof. A similar situation obtains in respect of indemnity payments that are dependent upon the continuance of the employee's disability which would ordinarily result in his absence from work. ¹

It is not enough that petitioner may be able to estimate its future liability1973 U.S. Tax Ct. LEXIS 164">*184 with reasonable accuracy -- a matter that we do not rule upon here -- but he must show that the liability itself is already fixed. If further events must occur before such liability can be fixed, an accrual would amount to nothing more than a reserve, and it is well established that in the absence of specific statutory provisions providing otherwise, reserves are not deductible under our income tax laws. Brown v. Helvering, 291 U.S. 193">291 U.S. 193, 291 U.S. 193">201-202.

Decision will be entered under Rule 50.