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The Court of Appeals for the Fifth Circuit emphasized in its
rationale
that the accumulated earnings tax is a penalty tax and
thus is to be strictly construed. Ivan Allen Co., 422
U.S. at 626, 95 S. Ct. at 2506. Due to the special
nature of the accumulated earnings tax and its focused
examination of earnings accumulated in a given year, it
would be inequitable and inconsistent not to allow a
corporation to deduct taxes assessed and attributable
for the year at issue, even though the corporation may
be contesting the taxes, as long as the corporation has
paid the taxes prior to the final computation of its
accumulated earnings tax liability. * * * [Rutter Rex,
supra at 1296.]
We respectfully disagree with the interpretation of the
Court of Appeals for the Fifth Circuit of section 1.535-2(a)(1),
Income Tax Regs. That regulation, in its amplification of the
language “tax accrued during the taxable year”, is designed to
permit a reduction from taxable income in arriving at accumulated
taxable income for a tax liability that had accrued during the
taxable year, but had not been paid (is “unpaid”). That final
caveat of the regulation simply explains that an accrued but
unpaid tax liability may not be used to reduce the base for the
accumulated earnings tax, if the tax is contested. The focus of
that final caveat is that no deduction is permissible where the
liability is contested. The Court of Appeals, however,
13(...continued)
respondent’s computation reflects that petitioner’s payment, in
the amount of $326,932, had been paid but not assessed.
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