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II. Whether a Contested Income Tax Deficiency That Has Been Paid
Is Deductible From Taxable Income in Arriving at Accumulated
Taxable Income
Here again, we focus on section 535(b)(1) and the underlying
regulation in considering whether a contested income tax
deficiency is a tax that “accrued during the taxable year”.
Petitioner reported an income tax liability of $2,674 on its 1995
corporate Federal income tax return. The $2,674 was remitted by
petitioner during March 1996, when it filed its 1995 return.
Thereafter respondent determined a deficiency in petitioner’s
income tax and, in addition, that petitioner was subject to the
accumulated earnings tax. After the petition was filed and
before we issued our opinion, petitioner tendered payment of the
income tax deficiency to respondent. Although petitioner
tendered payment, it continues to contest the income tax
deficiency. The parties disagree with respect to whether any
part of the income tax deficiency should be deducted from taxable
income to arrive at accumulated taxable income, the base for the
accumulated earnings tax.
In making the adjustments to taxable income to arrive at
accumulated taxable income, respondent deducted the $2,674 tax
liability reported by petitioner, even though the $2,674 was not
paid until after the close of the 1995 tax year. In addition to
the $2,674, petitioner argues that the income tax deficiency,
either in the amount determined by respondent or decided by the
Court, should also be deducted from taxable income to reduce the
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