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the deduction of State income taxes on business income, in
computing adjusted gross income under predecessors of section
62(a)(1), has been denied, in contrast to its allowance where net
operating losses were involved and the allowance of a deduction
for interest on Federal income tax deficiencies under
predecessors of section 62(a)(1). Tanner v. Commissioner, 45
T.C. 145 (1965), affd. per curiam 363 F.2d 36 (4th Cir. 1966).5
This treatment has been accepted by respondent insofar as the net
operating loss provisions are concerned but not with respect to
interest on deficiencies as a business expense under sections 162
and 62. See Rev. Rul. 70-40, 1970-1 C.B. 50.
Respondent argues that Polk v. Commissioner, supra, compels
the conclusion that, as a general rule, deficiency interest is
not a business expense, and that the cases recognizing a
deduction are unfounded and wrong. Respondent's argument rests
on the following statement of the Court of Appeals for the Tenth
Circuit:
Unless it can be said that the failure to properly
evaluate inventories, which form a part of a taxpayer's
return, arises because of the nature of the business,
and is ordinarily and necessarily to be expected,
interest on a deficiency assessment does not arise out
of the ordinary operation of the business and may not
be deducted. [Polk v. Commissioner, 276 F.2d at 603;
fn. ref. omitted.]
This statement is rooted in the requirement that deficiency
In Maxcy v. Commissioner, 26 T.C. 526 (1956), and Estate of
Broadhead v. Commissioner, T.C. Memo. 1966-26, affd. 391 F.2d 841
(5th Cir. 1968), we sustained the disallowance of the deduction
for State income taxes on the ground of failure of proof as to
the requisite business connection.
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