Ernst v. Commissioner

¶1OPINION.

¶2In the instant case, the payments for feed disallowed by respondent were not in the nature of deposits to be reimbursed to petitioner if he decided not to order delivery of the feed or if the grain, dealer would not or could not make such delivery. The payments were absolute and petitioner, who reported his income on a cash receipts and disbursements basis, was irretrievably out of pocket the amounts paid, which amounts were obviously expenses incident to “carrying on a trade or business.” In return for these payments, the grain dealer was unconditionally obligated to deliver to petitioner the quantity of feed which the amounts received would pay for at the prices in effect on the dates of delivery. There was no condition as to the obligation itself; the only condition was as to the quantum, of the obligation. Similar payments for feed to be used in the spring months of the following year were made by petitioner in December of all years subsequent to the taxable years.1 This practice does not substantiate the statements of counsel for respondent that “[t]hese transactions have no commercial meaning or sense other than as a tax dodge” and “that to allow such deductions would materially distort petitioner’s income.” Indeed, counsel for respondent frankly conceded that although the amounts disallowed in each of the taxable years had not been allowed in any other year, some such adjustments would have to be made in 1949 and the subsequent year in order to prevent the respondent’s own action from distorting petitioner’s income.

¶3These circumstances distinguish the instant case from R. D. Cravens, 30 T.C. 903.

¶4Eegardless of whether taxpayers are on a cash or accrual basis, the general rule is that deductions are allowable in the year of payment.

¶5On the record before us, we conclude that the payments here involved were “ordinary and necessary expenses paid or incurred during the taxable year[s] in carrying on [a] trade or business” and were properly deductible by petitioner in the years of payment under section 23 (a) (1) (A) of the Internal Revenue Code of 1939.

¶6We need not go into the question of whether or not the payments here involved constituted income to the grain dealer in the years when they were received. Cf. Veenstra & DeHaan Coal Co., 11 T.C. 964. The manner in which the grain dealer treated these payments taxwise is not relevant to a determination of petitioners’ tax liability. Citizens Federal Savings & Loan Assn. of Covington, 30 T.C. 285, 292.

¶7In our opinion the allowance of the deductions taken by petitioner in the taxable years would more clearly reflect his income than their disallowance, and no provision of section 43 of the Internal Kevenue Code of 1939 2 justifies respondent in disallowing such deductions.

¶8Decision will be entered under Buie 50.