Metro Leasing and Development Corporation East Bay Chevrolet Company, a Corporation v. Commissioner of Internal Revenue

This appeal involves the 1995 federal tax return filed by the Metro Leasing and Development Corporation and the East Bay Chevrolet Company (collectively “Metro Leasing”), two small, closely-held California corporations. We must decide whether the United States Tax Court properly determined the amount of a corporate officer’s salary that Metro Leasing may deduct as a reasonable business expense under 26 U.S.C. § 162 (a)(1). We affirm because the Tax Court did not clearly err when it adjusted the amount of this deduction. See Elliotts, Inc. v. Comm’r, 716 F.2d 1241, 1245 (9th Cir. 1983).

We must also resolve when a paid, but contested, federal income tax accrues for purposes of the accumulated earnings tax penalty under 26 U.S.C. § 535 (b)(1). This section provides that, when calculating the “accumulated taxable income” to which the tax is applied, a corporate taxpayer may deduct only those federal income taxes that had accrued in the taxable year in question. Here, the Tax Court did not permit Metro Leasing to deduct a contested tax liability that it paid in 2001 while its appeal in the Tax Court was pending. This presents a question of first impression in our circuit. We decline…