8 T.C. 654 (1947)
A taxpayer on the accrual basis can deduct contested taxes in the year they are paid if the liability was genuinely contested in prior years, preventing accrual.
Summary
Gibson Products Co. contested excise taxes assessed for 1936-1938, arguing it did not “manufacture” hair oil. After paying the taxes in 1943, it deducted them on its return. The IRS disallowed the deduction, claiming the taxes should have been accrued in the earlier years. The Tax Court held that because Gibson consistently contested the tax liability, it could not have properly accrued the taxes in 1936-1938 and was entitled to deduct them when paid in 1943. The court also addressed the deductibility of airplane expenses, partially allowing them after allocating some to the personal use of the company president.
Facts
Gibson Products Co. was in the wholesale drug, sundry, and cosmetic business. From 1936-1938, Gibson allegedly manufactured hair oil, but did not report or pay excise taxes on it, contending it merely bottled and distributed the product. In 1942, the IRS assessed additional taxes and penalties. Gibson paid the taxes in 1943 and filed a claim for refund, which was denied. Gibson also purchased an airplane in 1940. H.R. Gibson, the company president, obtained his pilot’s license in 1941 and used the plane for business and personal trips.
Procedural History
The IRS assessed a deficiency against Gibson for income and excess profits taxes for 1941-1943. Gibson challenged the deficiency in Tax Court, contesting the disallowance of the excise tax deduction and airplane expense deductions. Previously, Gibson had unsuccessfully sued for a refund of the excise taxes in district court.
Issue(s)
1. Whether excise taxes paid in 1943, but assessed for 1936-1938, are deductible in 1943 when the taxpayer contested the liability in the prior years.
2. Whether expenses related to operating an airplane are deductible as business expenses, and whether depreciation on the airplane is deductible.
Holding
1. Yes, because Gibson consistently contested the tax liability, it could not have properly accrued the taxes in 1936-1938 and was entitled to deduct them when paid in 1943.
2. Yes, in part. The expenses were deductible to the extent they were ordinary and necessary business expenses. However, expenses related to the president’s flight training were not deductible, and expenses after he was licensed must be allocated between business and personal use.
Court’s Reasoning
The court relied on Dixie Pine Products Co. v. Commissioner, which held that a taxpayer does not have to accrue an item of expense so long as he denies liability. The court found that Gibson consistently contended it did not “manufacture” the hair oil, placing it in the same position as the taxpayer in Dixie Pine, who denied using taxable gasoline. The court was unconvinced that Gibson acted in bad faith and found a persistent attitude that no manufacture occurred. Regarding the airplane expenses, the court distinguished between expenses incurred while the president was learning to fly (not deductible) and expenses incurred after he obtained his license. Because the plane was used for both company business and the president’s personal business (related to his other stores), the court allocated a portion of the expenses to each. The court determined that 11/78 of the post-license expenses should be allocated to the president’s individual businesses.
Practical Implications
This case reinforces the principle that a taxpayer on the accrual basis need not accrue a tax liability if the liability is genuinely contested. It provides a practical application of the Dixie Pine doctrine. It also demonstrates the importance of proper documentation when claiming business expense deductions, particularly when there is a mixed business and personal use of an asset. This case is frequently cited in tax law for the principle regarding contested tax liabilities and the allocation of expenses. Attorneys advising clients on tax matters must consider whether a genuine contest exists regarding a liability to determine the proper year for deduction.