An accrual-basis employer—a corporation which filed a consolidated federal income tax return with several subsidiaries--(1) reimbursed employees for certain medical expenses of employees and their qualified dependents; (2) established reserve accounts to reflect the employer's liability for medical care which had been received by covered individuals during the last quarter of 1972, but still not paid for by the employer as of December 31, 1972; (3) calculated the amount of the reserve based upon an estimate of the aggregate liability to be incurred for the period in question; and (4) claimed the estimated reserve as a business expense in an amended 1972 federal income tax return.

The corporation filed an amended return, claiming it was entitled to deduct its reserve as an accrued expense, and seek a refund.

General Dynamics challenged the disallowance and sought a federal income tax refund in the Claims Court, which sustained the deduction and expressed the view that (1) there was no dispute that expenses incurred by the employer in connection with its employee medical-benefit plans were deductible as ordinary and necessary business expenses under 162(a), so that the issue in the case was the timing of the deduction; and (2) deduction of the reimbursement reserve on the 1972 return satisfied the "all events" test, where (a) the fact of the employer's liability was established when a qualified employee or dependent received covered medical services, (b) the subsequent acts of claims filing and processing were ministerial in nature, not conditions precedent to liability, and (c) the employer's aggregate-estimate system for determining the amount of liability was logical and reasonable (6 Cl.

The Supreme Court reversed the judgment of the Federal Circuit, disallowing the deduction for employee medical expenses incurred, but not reported to the employer, in 1972.

Justice O'Connor, joined by Justices Blackmun and Stevens, wrote a dissent chastising the majority for adopting a rigid version of the "all events" that retreated from prior holdings, arguing that the decision will "unnecessarily burden[] taxpayers by further expanding the difference between tax and business accounting methods without a compelling reason to do so."