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F.2d 450 (4th Cir. 1958), we faced the question of whether
interest on a deficiency in Federal income tax resulting in part
from improper reporting of income from a sole proprietorship on
the cash basis instead of the accrual basis, along with related
attorney's and accountant's fees, was deductible as a business
expense. The taxpayers took a deduction under section 22(n)(1)
of the Internal Revenue Code of 1939, the predecessor of section
62(a), in order to arrive at adjusted gross income. While our
analysis was focused on the deductibility of attorney's fees, we
held that the deficiency was based on adjustments "attributable
to the business of the sole proprietorship" and allowed the
deduction for deficiency interest as an ordinary and necessary
business expense. Our reasoning was adopted by the Court of
Appeals.
In Polk v. Commissioner, 31 T.C. 412 (1958), affd. 276 F.2d
601 (10th Cir. 1960), we had to decide whether interest on a
deficiency, arising out of inventory valuation corrections, was a
deductible business expense for purposes of calculating a net
operating loss carryover. Finding that the deficiency arose in
connection with the taxpayer's business, the Court determined
that the case was controlled by Standing v. Commissioner, supra,
and held that the interest was deductible as an ordinary and
necessary business expense and was to be taken into account in
determining the net operating loss carryover. Again, our
reasoning was adopted by the Court of Appeals.
In Reise v. Commissioner, 35 T.C. 571 (1961), affd. 299 F.2d
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