I.R.C. § 461(H) : Tax Fairness and the Deduction of Future Liabilities

Section' 461(h), dealing with the treatment of liabilities by accrual-method taxpayers, was enacted in 1984, in response to the failure of the Internal Revenue Code to recognize time-value-of-money concepts in the tax laws. Prior to the enactment of § 461(h), an accrual-method taxpayer could take a current deduction for a future obligation as long as the "all events" test was satisfied. Furthermore, the amount of that deduction was equal to the entire amount of that future obligation. Because allowing a current deduction for the full amount of the future liability was considered too generous, Congress considered two approaches to mitigate the effect of the current full deduction: 1. a time-value-of-money approach that would limit the current deduction to the discounted present value of the future obligation, or 2. a deferral approach that would defer any deduction for a future obligation until economic performance has occurred.Congress decided that the first alternative, the time-value of-money approach, would be too difficult to apply since an interest component would have to be taken into account.6 Congress instead selected the deferral approach, thereby eliminating the need to make present value calculations and, therefore, the need to select an appropriate discount rate. However, by selecting the deferral approach, Congress selected an approach which was inconsistent with other approaches to time-value-of money problems.'