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CB&T paid Key West Polo $460,000 to discharge Key West Polo’s
claim against Towers Construction relating to prior advances.
CB&T became subrogated to the rights of Key West Polo and had a
right of reimbursement from Towers Construction.28 Thus, CB&T
stood in the shoes of Key West Polo, and Towers Construction’s
liability to repay CB&T was akin to its liability to repay Key
West Polo its advances. Clearly, liability to repay an advance,
particularly one never taken into gross income in the first
instance, does not give rise to a deductible expense under
section 162 or otherwise.29 See Crawford v. Commissioner, 11
B.T.A. 1299, 1302 (1928).
In light of our disposition of this issue, we need not reach
respondent’s alternative argument that Towers Construction’s
28 Applicable Florida law recognizes two types of
subrogation–-conventional subrogation, which arises from
contractual rights between parties, and equitable or legal
subrogation, which arises from legal consequences of the acts and
relationships of the parties. See Dade County Sch. Bd. v. Radio
Station WQBA, 731 So. 2d 638, 646 (Fla. 1999). Although the
distinction is not significant for present purposes, it appears
most likely that conventional subrogation arose from the
contractual rights between CB&T and Towers Construction regarding
the letter of credit.
29 The record does not suggest that Towers Construction or
petitioners ever included the $460,000 advance in gross income.
Petitioners have not raised, and we do not reach, any issue as to
whether Towers Construction’s liability to CB&T should be
deductible as an amount previously taken into gross income by
Towers Construction under a claim of right when it received the
advances from Key West Polo. Cf. sec. 1341(a)(1) (in computing
tax where the taxpayer repays amounts held under claim of right,
the remedial mechanism of sec. 1341 applies only if the item was
included in gross income for prior years).
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