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interest on the corporate tax deficiencies, and ordinary and
necessary business expenses, disallowed for lack of section 274
substantiation, reduce earnings and profits.
Petitioners contend that accrued taxes reduce current
earnings and profits, Commissioner v. James, 49 F.2d 707 (2d Cir.
1931); Stern Brothers & Co. v. Commissioner, 16 T.C. 295 (1951),
and respondent has not argued otherwise. Respondent calculated
and took into account the accrued taxes in determining the
corporations' earnings and profits.
Petitioners are correct that accrued interest on taxes
should be accrued ratably each year as it becomes due. Stark v.
Commissioner, 29 T.C. 122, 128 (1957). However, the interest did
not become due until the returns for 1989 were due, March 15,
1990. Therefore, the GAPS and JJM earnings and profits for 1989
cannot be reduced by the interest due on the tax deficiencies in
issue. Id.
We have already found that petitioner failed to meet the
substantiation requirement of section 274 regarding his travel
and entertainment expenses, and we find that he has failed to
prove that the travel and entertainment expenses were ordinary
and necessary business expenses. Therefore, the earnings and
profits of GAPS and JJM should not be reduced by the amounts of
the purported travel and entertainment expenses, which will be
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