Andrew A. Sandor and Jeanne Sandor v. Commissioner of Internal Revenue

Petitioner, a cash basis taxpayer, appeals a Tax Court decision [ 62 T.C. 469 (1974)] which upheld the Commissioner’s disallowance of a prepaid interest deduction. We affirm.

In November 1968, petitioner arranged with a bank for a five year loan of $100,000 at 7V2% annual interest. On December 27, he prepaid $38,041.61, the interest to accrue over the next five years. The promissory note for the loan itself was not signed until December 31. Petitioner’s 1968 taxable income was $210,001, a substantial increase over his income for each of the previous four years.

On his 1968 tax return, petitioner deducted the five year prepayment of interest charges under § 163 of the Internal Revenue Code of 1954 [ 26 U.S.C. § 163 ]. Finding that the taxpayer’s accounting did not “clearly reflect income” (§ 446), the Commissioner disallowed the deduction.

Under § 461 a cash basis taxpayer normally can take any permissible deduction at the time the relevant expense is paid. Nevertheless, § 446 grants to the Commissioner broad discretionary authority to require another accounting method for any item in order to clearly reflect taxable income. Commissioner of Internal Revenue v. Hansen,…