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interpreted the term “unpaid” as the focus of the regulation’s
caveat and its controlling condition.
Petitioner argues that the result fashioned by the Court of
Appeals in Rutter Rex is more equitable. We observe, however,
that it is inconsistent in that it treats a paid but contested
deficiency differently from one that is unpaid and contested. In
either situation, there is no way to know whether a taxpayer’s
earnings will ultimately bear the burden of the contested
deficiency determination. The payment of a contested income tax
deficiency does not overcome the requirement that the obligation
be fixed or final for accrual.14
Petitioner argues that traditional accrual concepts (“all
events test”) should not be employed for determining income tax
accrued in the computation of accumulated taxable income.
Petitioner’s argument is based on the appellate court’s rationale
in Rutter Rex that it would be inequitable to prohibit a
reduction for a paid, but contested, tax deficiency. Petitioner,
however, has not provided a policy reason to treat taxpayers who
14 In addition, from the perspective of the accumulated
earnings tax, payment of a contested income tax deficiency some 5
or 6 years after the accumulation in question would appear to
have little relevance to the question of whether the tax “accrued
during the taxable year” or whether a taxpayer allowed its income
to accumulate beyond the reasonable needs of the business. The
quoted statutory language and the regimen of the accumulated
earnings tax address the proscribed accumulation at the time of
the accumulation.
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