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the deduction as a bad debt is sought to be made or for
a previous year,” and it is settled law that interest
cannot be charged off as a bad debt unless it has first
been charged on. Petitioner concedes that this is so,
but, argues that since it did in earlier years accrue
the interest and return it as income, this fully
satisfied the regulation and the decisions. It insists
that the view of the commissioner and the Tax Court,
that since taxpayer was not on the accrual but on the
cash basis, there was no improper accruing of interest,
adds to the law a provision which it does not contain,
in effect, that for an interest item to be charged off
as a bad debt, it must have been properly charged on.
Agreement with petitioner’s contention would be to
throw out of the window petitioner’s entire system of
tax accounting, leaving to the varying caprices and
whims of the taxpayer whether or not particular items
should be deferred, advanced or returned. * * * [Id.]
We cannot agree that W.L. Moody Cotton Co. supports petitioner’s
position, and, indeed, it is contrary to that position to the
extent it holds that interest must first be properly included in
a return for tax purposes before it can be deductible as a bad
debt.
Accounting methods are determinative of when an item of
income or deduction must be recognized but are not determinative
of whether the item meets the substantive requirements for being
an item of income or deduction. Petitioner properly accounted
for its interest income using the accrual method of accounting.
Under this method of accounting, unpaid interest which accrued
before January 1, 1985, was properly assigned to that period.
However, since petitioner was tax exempt during this period, it
realized no tax consequences from its accrued interest.
Petitioner’s accrued interest was not taxable income, it was not
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