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III. Validity of Sec. 1.535-2(a)(1), Income Tax Regs.
The final sentence of section 1.535-2(a)(1), Income Tax
Regs., reads: “In computing the amount of taxes accrued, an
unpaid tax which is being contested is not considered accrued
until the contest is resolved.” That sentence leaves little
doubt that the Secretary of the Treasury intended the test of a
section 535(b)(1) tax accrual to be the all events test. See
Doug-Long, Inc. v. Commissioner, 73 T.C. at 81 (“The last
sentence of this regulation is consistent with the definition of
accrued taxes which has been set forth in Dixie Pine Products Co.
v. Commissioner, supra; Great Island Holding Corp. v.
Commissioner, * * * [5 T.C. 150, 160 (1945)]; and sec. 1.461-
2(b)(2), Income Tax Regs.”). The only question is whether that
is a valid interpretation of the statutory command of section
535(b)(1) that, in computing accumulated taxable income, taxable
income be adjusted by subtracting certain taxes “accrued” during
the taxable year. In Doug-Long, Inc. v. Commissioner, supra at
82, we held that the last sentence of section 1.535-2(a)(1),
Income Tax Regs., validly interprets the statute. In J.H. Rutter
Rex Manufacturing Co. v. Commissioner, supra at 1296, the Court
of Appeals for the Fifth Circuit made a cogent argument that the
accumulated earnings tax, a penalty tax, should not be based on
earnings “that may not exist at all depending on the deficiency
claimed.” Taken to its logical conclusion, the Court of Appeals’
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