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and clearly does not purport to replace the long standing rules
concerning bad debt deductions.11
Petitioner also relies on certain statements that the Court
of Appeals for the Fifth Circuit made in W.L. Moody Cotton Co. v.
Commissioner, 143 F.2d 712, 714 (5th Cir. 1944), affg. 2 T.C. 347
(1943). In W.L. Moody Cotton Co., the taxpayer kept its books
and filed its Federal income tax returns on a cash receipt and
disbursements basis. However, from 1927 through 1935, it accrued
and reported as gross income in its returns for those years
interest on certain collateralized accounts and notes receivable.
In 1937, it charged off on its books of account and deducted in
its income tax return the interest that it previously accrued and
reported. This Court upheld the Commissioner’s disallowance of
the taxpayer’s deduction for its accrued, but unpaid, interest.
The Court of Appeals for the Fifth Circuit affirmed, stating:
11Petitioner also relies upon Rev. Rul. 55-434, 1955-2 C.B.
538, which it claims “further confirms the importance of
consistent application of Code � 166 to transactions straddling
an entity’s change in tax status.” Rev. Rul. 55-434, supra, did
not involve how to determine gain or loss upon foreclosure of a
mortgage. Rather it involved how to determine basis in real
property previously acquired in a foreclosure that occurred when
the taxpayer was tax exempt. The revenue ruling applied sec.
39.23(k)-3, Regs. 118, which provided that the unadjusted basis
of property acquired upon foreclosure is the fair market value of
the property at the date of the acquisition of the property. See
sec. 1.166-6(c), Income Tax Regs., which provides a similar rule.
The facts and legal question involved in that revenue ruling are
distinguishable, and petitioner’s reliance on that revenue ruling
is misplaced.
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