102 T.C. 87">*88 OPINION

Wells, Judge: Respondent determined a deficiency in petitioners' Federal income tax for the 1970 taxable year in the amount of $ 3,300,151. Petitioners are hereinafter collectively referred to as petitioner. The deficiency is based on respondent's disallowance of a portion of the deductions claimed 1994 U.S. Tax Ct. LEXIS 6">*8 by petitioner with respect to obligations it incurred under "structured settlements" it reached in 1980 ¹ with tort claimants. ² Petitioner claims deductions for the accrual of the total future payments to the tort claimants under the structured settlements. Respondent determined that petitioner's accrual of such payments does not clearly reflect income. The issue we must decide is whether respondent's determination is an abuse of discretion. The parties also presented extensive arguments on the issue of whether the obligations for which petitioner claims deductions have met the all events test required by the regulations for the accrual of deductions. We do not address those arguments because of our holding below that respondent's determination was not an abuse of discretion, even if it is assumed that the all events test is met.

1994 U.S. Tax Ct. LEXIS 6">*9 The parties submitted the instant case fully stipulated. At the time it filed the petition in the instant case, petitioner's 102 T.C. 87">*89 principal place of business was Dearborn, Michigan. Petitioner is engaged in a number of businesses, including the manufacturing of automobiles. Petitioner maintains its books and records and files its income tax returns using the accrual method of accounting.

During 1980, petitioner entered into approximately 20 "structured settlement" agreements resolving various personal injury or accidental death claims. The claimants were persons and survivors of deceased persons (tort claimants) whose injuries or deaths were allegedly the result of motor vehicle accidents caused by defective vehicles manufactured by petitioner. The settlement agreements provide for payments totaling $ 24,477,699 to be paid out over various periods, the longest of which is 58 years. Petitioner purchased single premium annuity contracts from various insurance companies with respect to all structured settlements it executed with the tort claimants during 1980. The total cost of the premiums for the annuity contracts was $ 4,424,587. ³ The annuity contracts were structured1994 U.S. Tax Ct. LEXIS 6">*10 so that yearly annuity payments to be received under the annuity contracts would equal the yearly amount of the deferred payments owed to the tort claimants under the structured settlement agreements. Some of the settlement agreements required petitioner to purchase annuities. None of the settlement agreements, however, released petitioner from liability with respect to the deferred payments. Petitioner remained the owner of all the annuity contracts, and, in the event the issuer defaulted, petitioner would be required to pay the remaining balance of the deferred payments owed to the tort claimants.

1994 U.S. Tax Ct. LEXIS 6">*11 A stipulated summary of the structured settlements is attached to this opinion as appendix A. The summary shows that petitioner's obligations to the tort victims were of three general types under the structured settlements. "Type I settlements" provided for periodic payments to be made for a period certain. "Type II settlements" provided for periodic payments to be made for the duration of the claimant's life. 102 T.C. 87">*90 "Type III settlements" contain elements of both type I and II settlements by providing for periodic payments to be made for a period certain, and thereafter, for the duration of the claimant's life.

On its 1980 return, petitioner claimed deductions for the various types of settlements as follows: ⁴ Type I settlements -- the total amount of the periodic payments; type II settlements -- the amounts it actually paid during 1980; type III settlements -- the total amount of payments for the period certain portion. In its amended petition, petitioner claims a deduction in 1980 for the total amounts paid or to be paid to the tort claimants under type I, type II, and type III settlement agreements. As a result, petitioner claims that the proper amount of the deduction1994 U.S. Tax Ct. LEXIS 6">*12 taken in 1980 should be increased to $ 24,477,699 from $ 10,636,994. In the notice of deficiency, respondent allowed total deductions of $ 4,259,464.

The parties stipulated that the present value of petitioner's total future obligations to the tort claimants does not exceed the amounts petitioner paid for the annuity contracts. A stipulated summary is attached as appendix B, which outlines: (1) The amount of the deduction allowed in the notice of deficiency; (2) the amount of the deduction claimed by petitioner on its 1980 return; (3) the amount1994 U.S. Tax Ct. LEXIS 6">*13 of petitioner's increased claim; and (4) the amount that remains in dispute.

For financial purposes, petitioner reported the structured settlements as follows: (a) Settlements for a period certain or for the remainder of the claimant's life, when funded by an annuity ⁵ -- the cost of the annuity was expensed in the year of settlement; (b) settlements for the remainder of the claimant's life, when not funded by an annuity -- the present value of the total payments for the projected life was expensed in the year of settlement; (c) settlements for a period certain, when not funded by an annuity -- the present value of the total of the payments would be expensed in the year of settlement; (d) settlements not funded by annuities -- the yearly 102 T.C. 87">*91 incremental change in the present value of the outstanding liability would be expensed each year as interest. For financial reporting purposes, petitioner did not create a reserve for amounts paid or projected to be paid to claimants under the 1980 structured settlement agreements.

1994 U.S. Tax Ct. LEXIS 6">*14 We must decide whether respondent's determination is an abuse of discretion. Respondent's position is that petitioner's accrual does not clearly reflect income and that its deduction should be limited to the cost of the annuity contracts, an amount which does not exceed the present value of such future payments. Petitioner claims that it is entitled to accrue for tax purposes the total future payments under its obligations to the tort claimants. Essentially, respondent would limit petitioner's deduction to the amounts petitioner expensed on its books for financial purposes for the year in issue.

Section 446(b)⁶ vests the Commissioner with broad discretion in determining whether a particular method of accounting clearly reflects income. RLC Indus. Co. v. Commissioner, 98 T.C. 457">98 T.C. 457, 98 T.C. 457">491 (1992); Capitol Fed. Sav. & Loan Association v. Commissioner, 96 T.C. 204">96 T.C. 204, 96 T.C. 204">209 (1991); Prabel v. Commissioner, 91 T.C. 1101">91 T.C. 1101, 91 T.C. 1101">1112 (1988), affd. 882 F.2d 820">882 F.2d 820 (3d Cir. 1989). The Commissioner's determination is entitled to more than the usual presumption of correctness. 98 T.C. 457">RLC Indus. Co. v. Commissioner, supra at 491;1994 U.S. Tax Ct. LEXIS 6">*15 RECO Indus., Inc. v. Commissioner, 83 T.C. 912">83 T.C. 912, 83 T.C. 912">920 (1984); Peninsula Steel Products & Equip. Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1029, 78 T.C. 1029">1044 (1982). Accordingly, the Commissioner's interpretation of the "clear reflection standard [of section 446(b)] 'should not be interfered with unless clearly unlawful.'" Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 439 U.S. 522">532 (1979) (quoting Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445, 280 U.S. 445">449 (1930)). The taxpayer bears "a heavy burden of [proof]," and the Commissioner's determination "is not to be set aside unless shown to be 'plainly arbitrary.'" 439 U.S. 522">Thor Power Tool Co. v. Commissioner, supra at 532-533 (quoting Lucas v. Structural Steel Co., 281 U.S. 264">281 U.S. 264, 281 U.S. 264">271 (1930)).

1994 U.S. Tax Ct. LEXIS 6">*16

The issue of whether the taxpayer's method of accounting clearly reflects income is a question of fact to be determined 102 T.C. 87">*92 on a case-by-case basis. See Pacific Enterprises & Subs. v. Commissioner, 101 T.C. 1">101 T.C. 1, 101 T.C. 1">13 (1993); 98 T.C. 457">RLC Indus. Co. v. Commissioner, supra at 489; Hamilton Indus., Inc. v. Commissioner, 97 T.C. 120">97 T.C. 120, 97 T.C. 120">128-129 (1991); 83 T.C. 912">RECO Indus., Inc. v. Commissioner, supra at 920; 78 T.C. 1029">Peninsula Steel Prod. & Equip. Co. v. Commissioner, supra at 1045; Sam W. Emerson Co. v. Commissioner, 37 T.C. 1063">37 T.C. 1063, 37 T.C. 1063">1067 (1962). In 96 T.C. 204">Capitol Fed. Sav. & Loan Association v. Commissioner, supra at 213, we stated:

In reviewing the Commissioner's actions, however, we do not substitute our judgment for the Commissioner's, nor do we permit taxpayers to carry their burden of proof by a mere preponderance of the evidence. Taxpayers are required to clearly show that the Commissioner's action was arbitrary, capricious, or without sound basis in fact. [Citations omitted.]

In reviewing the1994 U.S. Tax Ct. LEXIS 6">*17 Commissioner's determination that the taxpayer's method of accounting does not clearly reflect income, the function of a court is to determine whether there is any adequate basis in law for the Commissioner's conclusion. RCA Corp. v. United States, 664 F.2d 881">664 F.2d 881, 664 F.2d 881">886 (2d Cir. 1981); Louisville & N.R.R. v. Commissioner, 641 F.2d 435">641 F.2d 435, 641 F.2d 435">439 (6th Cir. 1981), affg. in part, revg. in part and remanding 66 T.C. 962">66 T.C. 962 (1976). Consequently, for petitioner to prevail, it must prove that respondent's disallowance of petitioner's deductions beyond the amounts petitioner paid to purchase the annuity contracts is arbitrary and capricious and without sound basis in fact or law.

Before we turn to the parties' arguments, a simple illustration will help frame the issue and highlight the distortion about which respondent complains. For our illustration, we take the numbers from settlement agreement A, set forth in appendix A, which provides for the claimant to be paid $ 504,000 in 42 equal, annual installments of $ 12,000. The payments are to be made from an annuity contract owned by petitioner, which cost $ 141,124. 1994 U.S. Tax Ct. LEXIS 6">*18 The implicit rate of return on the investment in the annuity contract is 8.19 percent. For its taxable year 1980, petitioner claims a current deduction of $ 504,000.

Assuming for the purposes of this illustration that, but for the settlement agreement in question, petitioner would have current taxable income in 1980 of at least $ 504,000, it is instructive to compare three scenarios: (1) In the first scenario, 102 T.C. 87">*93 the accident in question does not occur, the result of which is that petitioner receives an additional $ 504,000 of currently taxable income, the after-tax proceeds of which are invested over 42 years (no accident); (2) in the second scenario, the accident does occur, but petitioner discharges its liability in full by currently paying and deducting $ 141,124 and investing the remainder over 42 years (current payoff); and (3) in the third scenario, the events occur as they did in the instant case and petitioner currently deducts the total payments to be paid over 42 years, or $ 504,000 (full deduction).

Under the first scenario, assuming petitioner would be subject to a 40-percent marginal tax rate, petitioner would be left with $ 302,400 after tax. Assuming further1994 U.S. Tax Ct. LEXIS 6">*19 that petitioner could earn an after-tax rate of return of 8.19 percent, the $ 302,400 would grow to $ 8,249,751 over 42 years.

Under the second scenario, petitioner would currently deduct only the $ 141,124 it paid for the annuity leaving it with $ 362,876 of taxable income on which it would pay tax of $ 145,150, leaving $ 217,726 after tax. If the $ 217,726 is invested over the 42-year period, earning an after-tax rate of return of 8.19 percent, it would grow to $ 5,939,756.

Under the third scenario, petitioner would currently deduct the full $ 504,000 it was required to pay the tort claimants (the total of the $ 12,000 in annual payments over the 42-year period), and petitioner would pay no tax. Investing the $ 504,000 at an after-tax rate of return of 8.19 percent and taking into account annual payments of $ 12,000, petitioner, after 42 years, would have $ 9,898,901 remaining.

Summarizing:

1994 U.S. Tax Ct. LEXIS 6">*20 In the instant case, petitioner is claiming scenario 3 treatment. When we compare scenario 3 with scenario 1, petitioner 102 T.C. 87">*94 fares better than if the accident never occurred. As the illustration shows, if petitioner were allowed a full deduction for all of the future payments to the tort claimants, it would lead to the incongruous result that the greater a taxpayer's nominal liability for negligence, the more it benefits. ⁷1994 U.S. Tax Ct. LEXIS 6">*21 In effect here, the Government funds the payments to the tort victims and, in addition, petitioner is left with a greater fund than if the accident never occurred. As can be expected, the distortion caused by fully deducting payments extended over a long period of time has been a much-discussed topic. ⁸ The relevant comparison, however, is between scenario 2, the treatment petitioner used for financial purposes, and scenario 3, the treatment petitioner seeks for tax purposes. Respondent determined that petitioner's deduction should be limited to scenario 2.

1994 U.S. Tax Ct. LEXIS 6">*22 Petitioner's position is grounded upon three principal arguments: (1) That expenses which satisfy the "all events" test ⁹ cannot be disallowed under section 446(b) even if the accrual would not result in a clear reflection of income; (2) that respondent's position is a veiled attempt by respondent to apply post-1984 law to the instant case; and (3) that deferral of petitioner's deduction will result in a mismatching of its income and expenses. We will address each of petitioner's arguments in turn.

102 T.C. 87">*95 Petitioner's first argument is that respondent's determination is an abuse of discretion because the obligations which gave rise to the deduction satisfy the all events test and consequently1994 U.S. Tax Ct. LEXIS 6">*23 cannot be disallowed on the theory that the deductions do not clearly reflect income. We disagree. Based upon our analysis below, we hold that satisfaction of the all events tests for accrual does not necessarily preclude respondent's use of section 446(b) to determine that the accrual does not clearly reflect income. As stated above, the parties presented extensive arguments concerning whether the obligations in question meet the all events test. We, however, do not address those arguments, and, for the purpose of our discussion below, we assume that the all events test has been satisfied.

Petitioner relies heavily on United States v. Hughes Properties, Inc., 476 U.S. 593">476 U.S. 593 (1986). Petitioner contends that Hughes Properties stands for the proposition that an accrual basis taxpayer may deduct an expense that satisfies the all events test in the year of accrual, regardless of the time of payment. We find Hughes Properties to be distinguishable. Hughes Properties involved an accrual basis taxpayer which owned a gambling casino in Nevada. The casino had several special slot machines that provided for "progressive" jackpots; i.e., the 1994 U.S. Tax Ct. LEXIS 6">*24 jackpots increased over time based on the amount of machine usage, until either the jackpots were won or maximum figures were reached. Each progressive slot machine had a "payoff indicator" that showed casino customers the current level of the jackpot. At the end of each taxable year, the taxpayer calculated the sum of the payoff indicator amounts for all progressive slot machines. From that figure, the taxpayer subtracted the equivalent figure that had been computed at the end of the prior year. The taxpayer accrued the increase in the future payoff liability as a deductible ordinary business expense.

The Commissioner disallowed the deduction on the ground that the all events test had not been satisfied because the liability was not fixed. Prior to addressing the issue of whether the taxpayer satisfied the all events test, the Supreme Court stated:

The major responsibility of the Internal Revenue Service is to protect the public fisc. Therefore, although section 446(c)(2) permits a taxpayer to use 102 T.C. 87">*96 an accrual method for tax purposes if he uses that method to keep his books, section 446(b) specifically provides that if the taxpayer's method of accounting "does not 1994 U.S. Tax Ct. LEXIS 6">*25 clearly reflect income," the Commissioner may impose a method that "does clearly reflect income." Thus, the "Commissioner has broad powers in determining whether accounting methods used by a taxpayer clearly reflect income." [476 U.S. 593">Id. at 603; citations omitted.]

The Supreme Court then rejected the Commissioner's assertion that the liability in question was too contingent to meet the all events test. In the context of dismissing the Government's fear of the potential for manipulation, the Court stated:

None of the components that make up this parade of horribles, of course, took place here. Nothing in this record even intimates that * * * [the taxpayer] used its progressive machines for tax-avoidance purposes. Its income from these machines was less than 1 percent of its gross revenue during the tax years in question. * * * [The taxpayer's] revenue from progressive slot machines depends on inducing gamblers to play the machines, and, if it sets unreasonably high odds, customers will refuse to play and will gamble elsewhere. Thus, respondent's economic self-interest will keep it from setting odds likely to defer payoffs too far into the future. Nor, 1994 U.S. Tax Ct. LEXIS 6">*26 with Nevada's strictly imposed controls, was any abuse of the kind hypothesized by the Government likely to happen. In any event, the Commissioner's ability, under section 446(b) of the Code, to correct any such abuse is the complete practical answer to the Government's concern. * * * [476 U.S. 593">Id. at 605; fn. ref. omitted; emphasis supplied.]

The Supreme Court's statement that the "complete practical answer" to correct abuses of the accrual method of accounting lies in the Commissioner's broad authority under section 446(b) indicates to us that, had the obligation which the taxpayer sought to accrue in Hughes Properties extended over 58 years, the Commissioner's time value of money concerns would not have been dismissed by the Court. The length of the payout in the instant case causes a gross distortion of petitioner's true economic obligations to the tort claimants.

Unlike the situation in Hughes Properties, ¹⁰ in the instant case, the significant length of time for the payout is the cause of the distortion. Moreover, petitioner's self-interest is furthered by deferring the payout period. Additionally, the instant case does not involve a1994 U.S. Tax Ct. LEXIS 6">*27 State law or regulation that 102 T.C. 87">*97 specifically limits the ability of petitioner to extend the payments over long periods of time.

Petitioner quotes two statements from Hughes Properties: (1) "An accrual method taxpayer is entitled to deduct an expense in the year it is 'incurred,' section 162(a), regardless of when it is actually paid." United States v. Hughes Properties, Inc., 476 U.S. 593">476 U.S. at 599; and (2) "the accrual method itself makes irrelevant the timing factor that controls when a taxpayer uses the cash receipts and disbursements method." 476 U.S. 593">Id. at 604 (fn. ref. omitted). We think petitioner reads too much into such statements. When read in context, the statements are merely a reiteration of the differences between an accrual method and the cash receipts1994 U.S. Tax Ct. LEXIS 6">*28 and disbursements method of accounting. In reaffirming such differences, the Supreme Court did not intend to impose limitations on the Commissioner's discretion under section 446(b). To the contrary, the above-quoted language from the Supreme Court's opinion in Hughes Properties specifically sanctions the use of section 446(b) by the Commissioner to cure abuses which might arise out of the inappropriate use of an accrual method.

Petitioner also relies on Hallmark Cards, Inc. v. Commissioner, 90 T.C. 26">90 T.C. 26 (1988). Petitioner contends that because the Code allows taxpayers to use an accrual method, the Commissioner has no authority to reject the method when it meets the all events tests for accrual. In furtherance of its contention, petitioner cites the following statement from Hallmark Cards:

Respondent's broad authority to determine whether a taxpayer's accounting method clearly reflects income is limited, in that he may not reject, as not providing a clear reflection of income, a method of accounting employed by the taxpayer which is specifically authorized in the Code or regulations and has been applied on a consistent basis. [Hallmark Cards, Inc. v. Commissioner, 90 T.C. 26">90 T.C. 31;1994 U.S. Tax Ct. LEXIS 6">*29 citation omitted.]

We think that petitioner interprets the foregoing quote too broadly. As we read Hallmark Cards, we addressed only the question of whether the all events test had been met for the accrual of income by the taxpayer. In Hallmark Cards, we agreed with the taxpayer that the all events test had not been met and therefore that accrual of the income in question was not proper. In that case, the deferral of the income 102 T.C. 87">*98 was from December 31 to January 1. Consequently, Hallmark Cards did not involve a gross distortion caused by a long payout period such as that involved in the instant case. Moreover, the principle that a method specifically sanctioned in the Code or regulations cannot be rejected under section 446(b) is derived from Orange & Rockland Utilities, Inc. v. Commissioner, 86 T.C. 199">86 T.C. 199, 86 T.C. 199">215 (1986). In that case, we held that the "cycle meter reading" method provided in the regulations and used by the taxpayer was a permissible method under section 446(c)(2). Orange & Rockland dealt with a specific method of accrual; it did not suggest that any method of accrual is to be protected from the Commissioner's1994 U.S. Tax Ct. LEXIS 6">*30 scrutiny under section 446(b). Consequently, we do not think that Hallmark Cards stands for the proposition that no accrual method may be rejected under section 446(b) merely because section 446(c) permits an accrual method to be used. Indeed, in Estate of Ratliff v. Commissioner, 101 T.C. 276">101 T.C. 276, 101 T.C. 276">281 (1993), we recently stated that Hallmark Cards stands for the proposition that "respondent does not have unbridled discretion under section 446 in that she cannot force a taxpayer to adopt another method of accounting if the taxpayer's method clearly reflects income." In short, we view Hallmark Cards as addressing only the issue of whether the taxpayer satisfied the all events test.

In the instant case, we think that the statute itself provides clear guidance on the issue of whether the clear reflection standard is subordinate to the all events test. Section 446 provides in relevant part:

SEC. 446(a). General Rule. -- Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.

(b) Exceptions. -- If * * * the method used does not clearly reflect income, 1994 U.S. Tax Ct. LEXIS 6">*31 the computation of taxable income shall be made under such method as, in the opinion of the Secretary, does clearly reflect income.

(c) Permissible Methods. -- Subject to the provisions of subsections (a) and (b), a taxpayer may compute taxable income under any of the following methods of accounting --

(1) the cash receipts and disbursements method;

102 T.C. 87">*99 (2) an [¹¹] accrual method;

[Emphasis supplied.]

Gerber, J., dissenting:

I respectfully disagree with the majority's holding that petitioner's method of accounting for its settlement agreements does not clearly reflect income. 102 T.C. 87">*107 The controversy in this case concerns the proper amount and timing of petitioner's accrual and deduction of 1980 tort claim settlements. Petitioner, for tax reporting purposes, is on the accrual method of accounting and has met the regulatory and case law requirements for accrual under the all events test. Respondent does not argue that petitioner manipulated accrual accounting methodology, or that the transactions lack substance or were designed for tax-avoidance purposes. Instead, respondent argues that the period between the deduction and payment is too long and distorts income, and that petitioner is entitled to deduct only the present value of its obligations to claimants under the structured settlements. That position is rooted in time value of money concepts and ignores established legal principles concerning the accrual method of accounting (the all events test) and results in the retroactive application of 1984 legislation. ¹ Respondent's determination is accordingly without1994 U.S. Tax Ct. LEXIS 6">*48 an adequate basis in law, plainly arbitrary, and, therefore, an abuse of discretion under section 446(b). Until 1984, the courts looked to the all events test as the standard to determine, for tax purposes, whether an obligation could be accrued and deducted.

All Events Test -- The majority holds that, even assuming that the transactions pass the all events test, respondent may disallow a taxpayer's deduction because it does not clearly reflect income when subjected to a time value analysis. The majority declares that petitioner has the burden of proving that respondent's determination is an abuse of discretion. In order to meet that burden, petitioner would be required to show the lack of "any adequate basis in law for the Commissioner's conclusion." (Majority op. p. 92.) The majority's1994 U.S. Tax Ct. LEXIS 6">*49 analysis is flawed because the all events test contains the standard by which accruals are measured. ² Therefore, 102 T.C. 87">*108 an analysis of the all events test is necessary to decide whether respondent had an adequate basis in law for her determination. Under such an analysis, the majority reached the wrong conclusion because petitioner has shown here that there is no adequate basis in law for respondent's conclusion.

1994 U.S. Tax Ct. LEXIS 6">*50 The all events test was judicially devised to measure whether an item can be accrued and deducted. Meeting the all events test normally qualifies a taxpayer for a deduction under the accrual method of accounting for a 1980 taxable year. ³United States v. Hughes Properties, Inc., 476 U.S. 593">476 U.S. 593, 476 U.S. 593">600 (1986). The all events test was formulated in case law more than 50 years ago and has long been embodied in section 1.461-1(a)(2), Income Tax Regs., which contains the following two requirements:

Under an accrual method of accounting, an expense is deductible for the taxable year in which [1] all the events have occurred which determine the fact of the liability and [2] the amount thereof can be determined with reasonable accuracy. * * *

The Supreme Court in1994 U.S. Tax Ct. LEXIS 6">*51 476 U.S. 593">United States v. Hughes Properties, Inc., supra at 599, 604, made clear that "An accrual-method taxpayer is entitled to deduct an expense in the year in which it is 'incurred,' § 162(a), regardless of when it is actually paid" and that "the accrual method itself makes irrelevant the timing factor that controls when a taxpayer uses the cash receipts and disbursements method." (Fn. ref. omitted.) The majority has incorrectly treated the holding in Hughes Properties as though it was purely factual in an effort to distinguish the facts of Hughes Properties without reconciling its foundational legal principles. Neither the legal principles ⁴ nor the factual context of Hughes Properties suggest or support the result reached by the majority.

1994 U.S. Tax Ct. LEXIS 6">*52 The majority is correct in its articulation that respondent is not preempted from questioning whether an accounting 102 T.C. 87">*109 method or the particular treatment of a specific item under an accounting method clearly reflects income. But the fact that the deduction occurs prior to the payment (the timing factor) does not, by itself, cause the accrual to run afoul of the clear reflection requirement or the all events test. Id. The majority focuses upon the method by which petitioner funds its obligations and decides that petitioner is entitled to deduct only its true economic cost, which the majority holds is the cost of the annuities purchased to fund the obligations. In a pre-1984 setting, the majority's consideration of the taxpayer's method of funding in evaluating an accrual accounting method question results in treating taxpayers differently depending upon whether they funded their obligations. Further, those taxpayers who were better at or more successful in their funding approach would be treated differently from those who were less successful. The question of funding or current cost of a transaction is unique to the cash accounting method, whereas the accrual accounting1994 U.S. Tax Ct. LEXIS 6">*53 method is concerned with the obligation to pay or right to receive. Accordingly, the all events test must be the proper pre-1984 measure of the amount of an obligation and whether it is deductible. Here, petitioner passed that test and so there must be some abuse or other reasoning by which to measure or show how income was not clearly reflected. The majority has not found or explained that cause or abuse.

In Hughes Properties, the Government argued that taxpayers would be able to meet the all events test but that a transaction might still not clearly reflect income. The Supreme Court indicated that "Nothing in * * * [that] record even intimates that * * * [the taxpayer] used its progressive machines for tax-avoidance purposes" and pointed out that the Commissioner had authority under section 446(b) to curb abuse which might occur in other cases. 476 U.S. 593">Id. at 605.

The type of abuse that the Supreme Court suggested that respondent could curb is not present in this case. The majority relies upon Prabel v. Commissioner, 91 T.C. 1101">91 T.C. 1101 (1988), affd. 882 F.2d 820">882 F.2d 820 (3d Cir. 1989), a tax shelter type1994 U.S. Tax Ct. LEXIS 6">*54 case where the transactions were contrived to produce tax benefits. In Prabel the taxpayer used an accelerated method of computing interest (Rule of 78 method) that bunches interest deductions on the front end of a payment schedule. Distortion was found because the proposed obligation was for an 102 T.C. 87">*110 extended period and a substantial portion of the deductions was taken early in the life of the stream of payments.

It was the use of an accelerated computation method that caused the distortion in Prabel, and this Court found that the Rule of 78 method was not appropriate for long-term payment schedules. In the context of Prabel, the Commissioner and this Court had available established alternative methods of reporting the transaction that more clearly reflected income. Petitioner here does not use an accelerated method or any methodology different from other taxpayers using the accrual method of accounting for pre-1984 tax purposes. Nor has the majority found that the accrual method is only appropriate for shorter term transactions. It is only by the use of a time value of money analysis and consideration of the method by which petitioner funds its obligations1994 U.S. Tax Ct. LEXIS 6">*55 that the difference between the amount of the deduction accrued and the time value cost to petitioner is even revealed. The majority, however, has not discussed the fact that all accrual basis taxpayers have a time value benefit due to the accrual. Additionally, there is no analysis showing at what point the passage of time makes a particular accrual abusive or distorts income. Finally, without the time value analysis, it would not be possible to show that petitioner's transaction does or does not clearly reflect income.

Respondent does not challenge the accrual principle that the deduction and payment may fall in different tax periods. Instead, it is the time lapse and time value concepts that respondent contends are the cause for the lack of clear reflection determination regarding petitioner's claimed deductions. Respondent's contention raises the inquiries of whether the passage of time and/or matching of income and deductions concepts singly or jointly do or should result in petitioner's income not being clearly reflected.

A single case was cited by respondent and referenced by the majority in support of the position that accrued obligations that have been incurred 1994 U.S. Tax Ct. LEXIS 6">*56 are not deductible solely because of remoteness or differences between the time of the accrual and the payment. The majority recognizes the paucity of authority and/or explanation in that case. Mooney Aircraft, Inc. v. United States, 420 F.2d 400">420 F.2d 400 (5th Cir. 1969) (a 1969 opinion which was issued without the benefit of the Supreme Court's 1986 opinion in 476 U.S. 593">United States v. Hughes Properties, Inc., supra).102 T.C. 87">*111 Furthermore, Mooney is distinguishable from this case.

Mooney involved an aircraft manufacturer that issued $ 1,000 "bonds" in connection with the sale of aircraft. The bond was redeemable by the then owner of the aircraft at the time of the aircraft's ultimate retirement. In the year of sale, the taxpayer deducted $ 1,000 for each aircraft sold. The Court of Appeals for the Fifth Circuit, ⁵ after holding that the all events test had been met, held that the $ 1,000 deductions in the year of sale did not clearly reflect income for two integrated reasons: (1) "many or possibly most of the expenses which taxpayer wishes to presently deduct will not actually be paid for 15, 20 or even 30 years"; and (2) "The longer the time the 1994 U.S. Tax Ct. LEXIS 6">*57 less probable it becomes that the liability, though incurred, will ever in fact be paid." 420 F.2d 400">Mooney Aircraft, Inc. v. United States, supra at 409, 410.

The first reason advanced in Mooney addresses the same question that was addressed in 476 U.S. 593">United States v. Hughes Properties, Inc., supra; i.e., that payment will not occur in the year of accrual. In Hughes Properties the taxpayer was obligated under State law to pay a gaming machine jackpot, but at the close of the taxable year no winner had been identified. Further, it was possible that the jackpot would not be won for several accounting periods. The Supreme Court in Hughes Properties held that the amount of the jackpot payable in that case was fixed and determinable despite the timelag. In this regard, businesses may accrue and pay obligations based upon differing facts and circumstances. 1994 U.S. Tax Ct. LEXIS 6">*58 It is arbitrary to establish a rule that any particular length of time, ipso facto, would result in the denial of an otherwise accruable deduction. Petitioner here did not autonomously choose the number of years for payment in order to obtain a current deduction. The deductions are claimed in connection with settlements of the contested claims of adversarial third parties. Petitioner did not have unfettered control over the timing of the payments.

Moreover, in Burnham Corp. v. Commissioner, 90 T.C. 953">90 T.C. 953, 90 T.C. 953">959-960 (1988), affd. 878 F.2d 86">878 F.2d 86 (2d Cir. 1989), we found Mooney to be both inapposite to and distinguishable from 102 T.C. 87">*112 situations such as this one involving payments under a settlement agreement which commenced contemporaneously with the accrual and claimed deduction.

Finally, the discussion in the Mooney opinion seems to blur the distinction between the all events test and the measurement of the clear reflection of income. Although the discussion in Mooney straddles both concepts, it appears more aptly to be rooted in the principles of the all events test. In Mooney, it was stated that the taxpayer1994 U.S. Tax Ct. LEXIS 6">*59 had passed both prongs of the all events test. Notwithstanding that holding, the reasons provided for disallowing the $ 1,000 deductions would just as easily have supported the holding that the all events test had not been met. The majority opinion in this case follows the same erroneous approach as was followed in Mooney.

Application of 1984 Legislation -- It is significant to note that the majority has, for the first time in a taxable year prior to the enabling 1984 tax legislation, permitted respondent to require an accrual basis taxpayer to use time value standards to measure accrual transactions. Although the accruals and deductions here may represent extreme examples of the deferral concept inherent in the accrual method, respondent was not justified in denying the deduction as decided by the majority.

Congress, by enacting section 461(h)(2)(C)(ii) in the 1984 Tax Act, specifically required all taxpayers to, in essence, use the cash method to account for periodic payments made pursuant to tort settlements occurring after July 18, 1984. That statute provides that, for certain described items, "the all events test shall not be treated as met any earlier than when 1994 U.S. Tax Ct. LEXIS 6">*60 economic performance * * * occurs." Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 91(a), 98 Stat. 494, 598. Section 461(h) is prospective only and was described in the legislative history in the following manner: "the rules relating to the time for accrual of a deduction by a taxpayer using the accrual method of accounting should be changed to take into account the time value of money." S. Prt. 98-169, at 266 (1984). ⁶ Accordingly, to the extent that as a matter of tax 102 T.C. 87">*113 policy the accrual method may be inappropriate to account for structured settlements, it has been prospectively remedied by the 1984 legislation. ⁷

1994 U.S. Tax Ct. LEXIS 6">*61 But for the addition of section 461(h) and the time value approaches in a limited number of other sections of the Internal Revenue Code, ⁸ courts have not heretofore held that respondent is empowered to employ time value principles in a clear reflection analysis. See Follender v. Commissioner, 89 T.C. 943">89 T.C. 943 (1987); Pritchett v. Commissioner, T.C. Memo. 1989-21, affd. without published opinion 944 F.2d 909">944 F.2d 909 (9th Cir. 1991), affd. without published opinion sub nom. Buchbinder v. Commissioner, 994 F.2d 908">994 F.2d 908 (9th Cir. 1991); Henkind v. Commissioner, T.C. Memo. 1992-555. The parade of "horribles" described in the majority's examples are brought to light only through a time value or present value analysis.

Matching of Income and Deductions -- The majority holds that petitioner's method of accounting for financial purposes1994 U.S. Tax Ct. LEXIS 6">*62 results in a better matching of income and deductions than the method used for tax purposes. As rationale for this holding, the majority points out that for financial purposes, petitioner expenses only the cost of the annuity to fund its obligation or the present value of their obligation. "As * * * [the majority] [sees] it, the true economic costs of petitioner's losses to the tort claimants are the amounts it paid for the annuities." Majority op. p. 104.

The majority's holding and analysis does not address the concept of matching. ⁹ Instead, time value concepts -- "true economic cost" and petitioner's financial accounting method -- are the focus of and rationale provided for the majority's holding.

1994 U.S. Tax Ct. LEXIS 6">*63 102 T.C. 87">*114 In this regard, it is well established that financial and tax accounting may and do vary. Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522 (1979). Although it may seem incongruous that a large numerical difference can exist between financial and tax accounting, such differences have long been recognized. Because petitioner was on the accrual method, it was entitled to accrue and deduct ¹⁰ the amount permitted under the regulation and the all events test. More importantly, although financial accounting standards may have permitted the use of time value or present value analysis under the accrual method, such was not the case for the use of accrual method for tax purposes as it had developed and was in effect for the 1980 tax year.

1994 U.S. Tax Ct. LEXIS 6">*64 Again, the majority has not addressed the basic concepts underlying the accrual method. Those concepts do not focus upon actual payment or receipt, but rather upon the obligation to pay or the right to receive. ¹¹1994 U.S. Tax Ct. LEXIS 6">*65 Other than their reliance on the lapse of time, the majority does not attempt to explain why income is not clearly reflected or at what point in the infinite possibilities of taxpayers' payment obligations the distortion may or could occur. The majority has not found any abuse or misapplication of the principles involved in petitioner's practice or methodology and, accordingly, petitioner's 1980 claim of $ 24,477,699 for structured settlements clearly reflects income for tax purposes. ¹²

Abuse of Discretion -- Here, randomly occurring human injury or death provoked controversy and the eventual settlement of claims. Settlements were reached between adversarial parties and were not contrived. Petitioner was not compelled or required to ignore the potential for a tax advantage 102 T.C. 87">*115 because the claim being settled was founded in human pain and suffering. The time value analysis and related examples described in the majority opinion infer that iniquitous or sinister benefits inure to petitioner. There has been no finding here that petitioner, singly or in collusion with the claimants, caused or arranged these transactions merely or primarily to effectuate a tax benefit or that the transactions were without substance. Admittedly, petitioner here is aggressively pursuing1994 U.S. Tax Ct. LEXIS 6">*66 an established tax accounting principle, but the transaction passes all of the traditional tests. This is a type of exploitation which Congress must address as it did in the 1984 Tax Act and is a policy matter beyond the fiat given to respondent in section 446 and beyond the authority of this Court to change.

Although broad statutory discretion is vested in the Commissioner, a taxpayer cannot be required to change from an accounting method that clearly reflects income because the Commissioner considers an alternate method to more clearly reflect income. Molsen v. Commissioner, 85 T.C. 485">85 T.C. 485, 85 T.C. 485">498 (1985); Peninsula Steel Products & Equip. Co. v. Commissioner, 78 T.C. 1029">78 T.C. 1029, 78 T.C. 1029">1045 (1982); Fort Howard Paper Co. v. Commissioner, 49 T.C. 275">49 T.C. 275 (1967). ¹³ Similarly, if a taxpayer's method of accounting is specifically authorized by the Internal Revenue Code or the underlying regulations and has been applied on a consistent basis, respondent has not been allowed to arbitrarily require a change or reject the taxpayer's method. RLC Industries Co. v. Commissioner, 98 T.C. 457">98 T.C. 457, 98 T.C. 457">491-492 (1992);1994 U.S. Tax Ct. LEXIS 6">*67 Prabel v. Commissioner, 91 T.C. 1101">91 T.C. 1101, 91 T.C. 1101">1112 (1988), affd. 882 F.2d 820">882 F.2d 820 (3d Cir. 1989); Hallmark Cards, Inc. v. Commissioner, 90 T.C. 26">90 T.C. 26, 90 T.C. 26">31 (1988).

In general, a method of accounting clearly reflects income when it results in accurately reported taxable income under a recognized method of accounting. Wilkinson-Beane, Inc. v. Commissioner, 420 F.2d 352">420 F.2d 352, 420 F.2d 352">354 (1st Cir. 1970), affg. T.C. Memo. 1969-79; Caldwell v. Commissioner, 202 F.2d 112">202 F.2d 112, 202 F.2d 112">115 (2d Cir. 1953), affg. a Memorandum Opinion of this Court; Herberger v. Commissioner, 195 F.2d 293">195 F.2d 293 (9th Cir. 1952), affg. a Memorandum Opinion of this Court; Rotolo v. Commissioner, 88 T.C. 1500">88 T.C. 1500, 88 T.C. 1500">1513 (1987).

102 T.C. 87">*116 Respondent has the1994 U.S. Tax Ct. LEXIS 6">*68 authority under section 446(b) to curb abuse. However, as in 476 U.S. 593">United States v. Hughes Properties, Inc., supra, there is nothing in this record to indicate that petitioner set up the settlement agreements for tax avoidance purposes. Instead, petitioner minimized its tax liability while complying with the tax laws in force and effect during 1980. No authority existed for 1980 tax year to impose time value of money concepts in the reporting of transactions under the accrual method of accounting. Respondent's use of such concepts for transactions prior to 1984 is arbitrary.

Accordingly, I would hold that respondent's disallowance of petitioner's deduction was not adequately based in law and results in an abuse of discretion in this case.

Shields and Chiechi, JJ., agree with this dissent.