T.C. Summary Opinion 2001-110
UNITED STATES TAX COURT
JEFFREY D. AND BONITA L. WOODLEE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10897-98S. Filed July 25, 2001.
Jeffrey D. and Bonita L. Woodlee, pro se.
Ronald T. Jordan, for respondent.
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for 1994. Rule references are to the Tax
Court Rules of Practice and Procedure. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority.
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Respondent determined a deficiency of $7,615 in petitioners’
1994 Federal income tax. The issue for decision is whether
petitioners are entitled to a deduction for certain accrued but
unpaid business expenses.
Background
Some of the facts have been stipulated and are so found.
Petitioners are husband and wife. They filed a timely joint 1994
Federal income tax return which was prepared by a professional
income tax return preparer. At the time that the petition was
filed, they resided in Beech Grove, Indiana. References to
petitioner are to Jeffrey D. Woodlee.
During 1994, petitioner was the sole proprietor of Specialty
Insulators (Specialty), a business engaged in the installation of
insulation in commercial and residential buildings. Business
income was deposited into, and business expenses were paid from,
a separate checking account maintained by petitioner for such
purposes.
Included with petitioners’ 1994 return is a Schedule C,
Profit or Loss From Business, on which the income and deductions
attributable to Specialty are reported as follows:
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Gross income $136,871
Car and truck expenses 13,847
Depreciation/sec. 179
expense deduction 1,031
Insurance 719
Office expense 5,950
Rent/lease 828
Supplies 110,775
Taxes/licenses 2,500
Total expenses 135,650
Net Profit 1,221
According to the Schedule C, the above items were reported in
accordance with the cash method of accounting. The Schedule C
further suggests that petitioner “started or acquired this
business” before 1994.
Although petitioners claimed a $110,775 deduction for
supplies in 1994, only $81,449 of that amount had been paid as of
the close of that year. The balance, $29,326, was paid in
installments made during later years.
In the notice of deficiency, respondent disallowed that
portion of the deduction for supplies that represented unpaid
expenses. Other adjustments made in the notice of deficiency are
not in dispute.
Discussion
In general, under the cash method of accounting, income is
recognized in the year of actual or constructive receipt, and
expenses are deductible in the year of actual payment. Sec.
1.446-1(c)(1)(i), Income Tax Regs. Respondent, pointing to the
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block checked on the Schedule C indicating that the cash method
of accounting was used to compute the items of income and
deductions reported thereon, argues that petitioners’ 1994
deduction for supplies is limited to the amount paid for such
expenses by the close of that year. Petitioners, however, claim
that, for 1994, petitioner’s business was on the accrual method
of accounting, under which the deduction for supplies would be
allowed as claimed on their 1994 return. See sec. 1.446-
1(c)(1)(ii), Income Tax Regs.
We disagree with petitioners’ claim that petitioner’s
business was on the accrual method of accounting for 1994. The
claim is inconsistent with the express representation made on the
Schedule C and inconsistent with petitioner’s testimony that his
“checkbook was * * * [his] bookkeeper”. Furthermore, there is
nothing in the record that suggests that other deductions were
computed on the accrual method of accounting, and it is clear
that the income reported on the Schedule C was not. “[A]
taxpayer who uses the cash method of accounting in computing
gross income from his trade or business shall use the cash method
in computing expenses of such trade or business.” Sec. 1.446-
1(c)(1)(iv)(a), Income Tax Regs.
In accordance with the cash method of accounting,
petitioners are entitled to a deduction for supplies only to the
extent that such expenses were paid during 1994. Respondent’s
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determination in this regard is therefore sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing and the agreement of the parties
with respect to other items,
Decision will be entered
under Rule 155.