- 10 -
out during cross-examination,2 Mr. Gentry would be able to make
undetected retroactive corporate allocations after the end of
the petitioner’s fiscal year.
Case law under former section 2673 fully supports
respondent’s determination. In both Jerome Castree Interiors,
Inc. v. Commissioner, supra, and Lacy Contracting Co. v.
Commissioner, 56 T.C. 464 (1971), the Court disallowed the
claimed accruals, holding that the corporation must determine,
2 Q. Isn’t it possible that you could
have told Dal Livengood some time after
July 31, ‘94, that I believe I should
have a salary based on the current fiscal
conditions of the company for 1994 of
$88,100. Is it possible --
A. No, no. * * * Not after the 31st of July I
couldn’t have done that
Q. And why is that? * * *
A. Well, it’s not legal, is it?
3Former sec. 267, which was repealed in 1984, disallowed a
deduction for obligations payable to a related taxpayer if the
obligation was not paid within 2-1/2 months after the end of the
taxpayer’s fiscal year, and if the amounts would not be
includable by the related recipient under its method of
accounting for the taxable year during which the taxpayer’s
deduction accrued. “Because an accrued expense is deductible by a
taxpayer under the accrual method of accounting only in the
taxable year in which it accrues, a deduction disallowed under
sec. 267(a) was permanently lost. It could not be deducted at
some subsequent time when payment was made.” Staff of the Joint
Comm. on Taxation, General Explanation of the Revenue Provisions
of the Deficit Reduction Act of 1984 at 541 (J. Comm. Print
1984). The disallowance rule of former sec. 267 was replaced in
the Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 174, 98
Stat 704, with the current rule deferring the deduction until
recognized by the related recipient. A more restrictive view of
constructive receipt may be appropriate under the current
statutory scheme, which only defers the deduction until the year
of payment rather than disallowing it entirely.
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