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(W.D. Okla. 1971), affd. 464 F.2d 1188 (10th Cir. 1972); see sec.
1.446-1(c)(1)(I), Income Tax Regs. A cash basis taxpayer cannot
accrue an expense. See B & L Farms Co. v. United States, supra
at 415-416. Therefore, Hersco may not deduct the expense unless
it paid it.
The payment was not made in cash or property. Journal
entries nominally increased Hersco's indebtedness to Eicher, but
journal entries do not establish that a payment was made. Finoli
v. Commissioner, 86 T.C. 697, 743 (1986). The debit from
interest payable to loans payable to Eicher was simply a shift
from one account to another. See Baird v. Commissioner, 25 T.C.
387, 394 (1955).
Petitioners have failed to prove that the interest payment
was actually made. Thus, we hold that Hersco may not deduct the
$77,122 interest payment it reported as a guaranteed payment.
2. Eicher
Eicher is a cash basis taxpayer. As discussed at par. A-1,
above, a cash basis taxpayer is taxable on income when it is
actually or constructively received. Sec. 1.451-1(a), Income Tax
Regs. Eicher never received the interest payment in cash or
property. The payment was made only in the sense that it was
described by journal entries in the books and records of Hersco,
reflecting payment and a simultaneous "loan back" of the funds.
Hersco did not have enough funds to make the payment. During
1988, Hersco did not have a bank account or any recurring sources
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