Reginald Maurice Wise and Shannon Rae Wise - Page 18

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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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