Gibson v. United States - Tax Deductibility of Contingent Environmental Expenses

Detected February 11th, 2026

Summary

Petitioners John A. Gibson, Jr., and Mary Lou Gibson are seeking review from the U.S. Supreme Court regarding the Fifth Circuit's decision on the deductibility of environmental remediation expenses. The core issue is whether the 'all events' test for tax accrual requires absolute certainty of expense amounts for contingent liabilities.

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What changed

This document is a Petition for a Writ of Certiorari filed by John A. and Mary Lou Gibson with the U.S. Supreme Court, seeking to overturn a Fifth Circuit ruling. The Petitioners argue that the Fifth Circuit erred in its interpretation of the 'all events' test for tax accrual, as applied to environmental remediation expenses. Specifically, they contend that the appellate court incorrectly held that the exact amount of a deductible expense must be known with 'absolute certainty' in the tax year it is incurred and paid, even if the liability is fixed and determinable and the amount is reasonably ascertainable.

The practical implication of this petition is a potential re-evaluation of how contingent liabilities and environmental remediation costs are treated for tax deduction purposes. If the Supreme Court grants certiorari, the outcome could clarify the application of Internal Revenue Code Section 162(a) and the 'all events' test, potentially impacting how businesses account for and deduct expenses where the final cost is not immediately known. The case hinges on whether 'absolute certainty' of the amount is a prerequisite for deduction, or if a reasonably ascertainable amount for a fixed liability suffices.

What to do next

Monitor U.S. Supreme Court docket for Gibson v. United States (No. 22-101) for potential grant of certiorari.
Review internal accounting policies regarding the accrual and deduction of contingent environmental liabilities.
Consult with tax counsel on the implications of the 'all events' test and 'absolute certainty' standard for deductible expenses.

Source document (simplified)

IN THE SUPREME COURT OF THE UNITED STATES

No. 22-101

Petition for a Writ of Certiorari

To the Honorable, the Chief Justice and Associate Justices of the Supreme Court of the United States:

The Petitioners, JOHN A. GIBSON, JR., and MARY LOU GIBSON, respectfully petition this Honorable Court for a writ of certiorari to review the judgment of the United States Court of Appeals for the Fifth Circuit, entered on March 15, 2022, in the case of John A. Gibson, Jr., et al. v. United States, No. 21-10001, affirming the judgment of the United States District Court for the Southern District of Texas, Houston Division, entered on December 15, 2020, in favor of the Respondent, the United States of America.

QUESTIONS PRESENTED

Whether the Fifth Circuit erred in holding that the "all events" test for accrual of a tax liability, as applied in United States v. General Dynamics Corp., 481 U.S. 239 (1987), requires a taxpayer to have "absolute certainty" of the amount of a deductible expense before that expense can be recognized for tax purposes, thereby effectively negating the "all events" test in cases involving contingent liabilities.
Whether the Fifth Circuit erred in holding that the Petitioners were not entitled to deduct certain environmental remediation expenses in the tax year in which they were incurred and paid, despite the fact that the liability for such expenses was fixed and determinable in that tax year, and the amount was reasonably ascertainable, even though the precise final cost was not known until a subsequent tax year.
Whether the Fifth Circuit erred in its interpretation and application of Internal Revenue Code Section 162(a), 26 U.S.C. § 162(a), by disallowing the deduction of ordinary and necessary business expenses that were fixed and determinable and paid during the tax year in question, solely because the exact amount of the liability was not known with absolute certainty until a subsequent tax year.

LIST OF PARTIES

The parties to the proceeding in the court below were John A. Gibson, Jr., and Mary Lou Gibson (Petitioners), and the United States of America (Respondent).

I. Opinions Below 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OPINIONS BELOW

The opinion of the United States Court of Appeals for the Fifth Circuit is reported at 925 F.3d 712 (5th Cir. 2022). A copy of the opinion is attached as Appendix A.

The judgment of the United States District Court for the Southern District of Texas, Houston Division, is unreported. A copy of the judgment is attached as Appendix B.

JURISDICTION

The judgment of the United States Court of Appeals for the Fifth Circuit was entered on March 15, 2022. This Court has jurisdiction to review the judgment of the Fifth Circuit by writ of certiorari pursuant to 28 U.S.C. § 1254(1). The petition for a writ of certiorari is timely filed within 90 days of the entry of the Fifth Circuit's judgment.

STATEMENT OF THE CASE

A. Background

Petitioners, John A. Gibson, Jr., and Mary Lou Gibson, were the sole shareholders of Gibson Environmental Services, Inc. ("GES"), a Texas corporation engaged in the business of providing environmental remediation services. GES operated a facility in Houston, Texas, where it treated and disposed of hazardous waste.

In 2010, GES discovered significant contamination at its facility, necessitating extensive and costly remediation efforts. GES retained ARCADIS U.S., Inc. ("ARCADIS") to develop and implement a remediation plan. ARCADIS provided an initial estimate of the remediation costs, which was later revised as the scope of the contamination became clearer.

GES incurred and paid substantial remediation expenses in 2010 and 2011. These expenses included costs for site assessment, engineering, labor, materials, and disposal. GES's tax returns for 2010 and 2011 reflected these expenses as deductions.

B. District Court Proceedings

The Internal Revenue Service ("IRS") audited GES's tax returns for 2010 and 2011. The IRS disallowed a significant portion of the environmental remediation expenses deducted by GES, asserting that these expenses were not deductible in the years they were incurred and paid because the exact amount of the liability was not fixed and determinable until a subsequent tax year.

Petitioners paid the additional taxes assessed by the IRS and filed a refund claim, which was denied. Petitioners then filed suit in the United States District Court for the Southern District of Texas, Houston Division, seeking a refund of the taxes paid.

The District Court granted summary judgment in favor of the United States, holding that the environmental remediation expenses were not deductible in 2010 and 2011 because the "all events" test was not satisfied. The court found that while the fact of liability was established, the amount of the liability was not fixed and determinable with sufficient certainty until a later tax year.

C. Fifth Circuit Proceedings

Petitioners appealed the District Court's decision to the United States Court of Appeals for the Fifth Circuit. The Fifth Circuit affirmed the District Court's judgment.

The Fifth Circuit held that, under the "all events" test, a taxpayer must have "absolute certainty" regarding the amount of a deductible expense before it can be recognized for tax purposes. The court reasoned that because the precise final cost of the environmental remediation was not known until a subsequent tax year, the "all events" test was not met in 2010 and 2011.

The Fifth Circuit's decision creates a conflict with decisions from other circuit courts that have applied the "all events" test more flexibly in cases involving contingent liabilities where the amount is reasonably ascertainable.

REASONS FOR GRANTING THE WRIT

I. The Fifth Circuit's Decision Conflicts with This Court's Precedent and Creates a Circuit Split Regarding the Application of the "All Events" Test.

This Court's seminal decision in United States v. General Dynamics Corp., 481 U.S. 239 (1987), established the "all events" test for determining when a liability is incurred for tax purposes. Under this test, a liability is incurred when "all events" have occurred that will determine the fact and amount of the liability. Id. at 241.

The Fifth Circuit's interpretation of the "all events" test in this case, requiring "absolute certainty" of the amount of a deductible expense, is an overly stringent and erroneous application of this Court's precedent. The General Dynamics decision itself recognized that the "all events" test does not require "mathematical certainty" but rather that the amount be "fixed and determinable." Id. at 245.

The Fifth Circuit's holding effectively negates the "all events" test in cases involving contingent liabilities, such as environmental remediation expenses, where the precise final cost may not be known until the completion of the work. This interpretation conflicts with the decisions of other circuit courts, such as the Second Circuit in United States v. Hughes Properties, Inc., 836 F.2d 1200 (9th Cir. 1988), which have held that a liability is deductible when the amount is reasonably ascertainable, even if not precisely known.

This conflict creates uncertainty for taxpayers nationwide and undermines the uniform application of federal tax law. Granting certiorari is necessary to resolve this circuit split and provide clear guidance on the proper application of the "all events" test.

II. The Fifth Circuit's Decision Misinterprets and Misapplies Internal Revenue Code Section 162(a).

Internal Revenue Code Section 162(a), 26 U.S.C. § 162(a), allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." The Fifth Circuit's decision, by disallowing the deduction of environmental remediation expenses that were fixed and determinable and paid during the tax years in question, misinterprets and misapplies this fundamental provision of the tax code.

The expenses at issue were undeniably ordinary and necessary for GES's business operations. The fact of the liability was established by the discovery of contamination, and the amount was reasonably ascertainable based on expert