- 8 -
380 (7th Cir. 1962), we again had to decide whether certain
expenses, including interest on a Federal income tax deficiency,
stemming from the reporting of sales on a cash basis instead of
an accrual basis, were deductible as business expenses in
computing a net operating loss carryback. Recognizing that prior
to Standing v. Commissioner, supra, and Polk v. Commissioner,
supra, we had denied taxpayers a deduction for deficiency
interest in Aaron v. Commissioner, 22 T.C. 1370 (1954), we
concluded that, in Standing and Polk, we had departed from the
restrictive view of the phrase "attributable to trade or business
carried on by the taxpayer" utilized in Aaron4 and that Aaron
should no longer be followed where net operating losses were
concerned. Reise v. Commissioner, supra at 579. We reaffirmed
the reasoning of Standing and Polk and, finding the factual
situation indistinguishable from those cases, held the deficiency
interest deductible as a business expense in determining the
amount of a net operating loss carryover. Again, our reasoning
was adopted by the Court of Appeals.
To complete our analysis of the pre-section 163(h)
situation, we note that because of explicit legislative history
The standard adopted by Aaron v. Commissioner, 22 T.C. 1370
(1954), imported the statement in the legislative history of sec.
22(n)(1) of the Internal Revenue Code of 1939 (the predecessor of
sec. 62(a)(1)) to the effect that expenses deductible under that
section were those "directly incurred in the carrying on of a
trade or business" and that "the connection contemplated by the
statute is a direct one rather than a remote one", giving State
income taxes as an example of a nondeductible expense. Reise v.
Commissioner, 35 T.C. 571, 577 (1961), affd. 299 F.2d 380 (7th
Cir. 1962).
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