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allocated $545,301 to 1993 and $545,301 to 1994. Amounts not
expensed in 1993 were reflected as prepayments on petitioner’s
balance sheet.
In preparing its income tax returns, however, petitioner
deducted the full amount expended for licenses and insurance in
the year of payment. Thus, in 1993, deductions of $4,308,460 and
$1,090,602 were taken for licenses and insurance, respectively.
Discussion
We must decide whether petitioner, as an accrual basis
taxpayer, may deduct expenditures for licenses, permits, fees,
and insurance in the year paid or whether deductions for such
costs must be spread ratably over the taxable years to which they
pertain.
Petitioner contends that, because the benefit of the subject
licenses and insurance extends less than 1 year into the
following tax period, the costs do not relate to property having
a useful life substantially beyond the taxable year. Hence,
petitioner argues that the costs do not require capitalization
under section 263 and may be currently deducted as a business
expense under section 162. Further, petitioner asserts that,
although the costs are expensed ratably over 2 years for purposes
of financial records and deducted currently, in 1 year, for tax
purposes, the method of tax accounting used clearly reflects
petitioner’s income within the meaning of section 446.
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