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C. Guaranteed Payment
Respondent contends that (1) Hersco may not deduct a $73,122
payment to Eicher, and (2) Eicher may not include the payment in
gross income. Petitioners contend that (1) the payment was
incorrectly reported as a guaranteed payment on Hersco's 1988 tax
return because, in actuality, it was a payment of interest on
Eicher's loans to Hersco; (2) Hersco can deduct the interest
payment; and (3) Eicher constructively received the payment, and
thus Eicher must include the interest payment in gross income.
Respondent agrees with petitioners that on Hersco's 1988
partnership return the payment was reported incorrectly as a
guaranteed payment. However, respondent contends that (1) Hersco
may not deduct the payment because it uses the cash method of
accounting, and (2) Eicher conceded that the payment is
includable in his gross income. We do not believe that Eicher
conceded the issue; the treatment of the payment on Eicher's tax
return relates to the treatment of the payment on Hersco's tax
return. We do, however, agree with respondent that Hersco may
not deduct the payment.
1. Hersco
Hersco is a cash basis taxpayer. A cash basis taxpayer may
not deduct an expense unless it was paid to its creditors during
the tax year. B & L Farms Co. v. United States, 238 F. Supp.
407, 415 (S.D. Fla. 1964), affd. 368 F.2d 571 (5th Cir. 1966);
Oklahoma Gas & Elec. Co. v. United States, 333 F. Supp 1178, 1181
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