Suriel v. Commissioner

VIDAL SURIEL, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 367–12. Filed December 4, 2013.

P’s wholly owned S corporation, V, claimed deductions for
unpaid obligations, both principal and interest, owed into the
Tobacco Master Settlement Agreement (MSA) fund, which is
a qualified settlement fund under I.R.C. sec. 468B. R dis-
allowed the deductions on the basis that economic perform-
ance did not occur until payment was actually made into the
MSA fund, pursuant to sec. 1.468B–3(c)(1), Income Tax Regs.
Under I.R.C. sec. 1366 R made adjustments to P’s individual
income tax returns and determined deficiencies in P’s income
tax. Held: V is not entitled to deductions for unpaid MSA
obligations, because economic performance does not occur
until the obligations are actually paid. See sec. 1.468B–3(c)(1),
Income Tax Regs. Held, further, because the special rules gov-
erning qualified settlement funds do not differentiate between
interest and principal, we afford them equal treatment. Held,
further, we sustain R’s deficiency determinations.

Edward T. Yevoli, Paul D. Turner, and Joey M. Lampert,
for petitioner.
Robert M. Ratchford and Jeffrey B. Fienberg, for
respondent.
GOEKE, Judge: Respondent determined deficiencies in peti-
tioner’s Federal income tax as follows:

Year Deficiency

2004 $33,912,933
2006 5,837,489

Respondent’s determinations of tax deficiencies result from
adjustments made following respondent’s examination of

507

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 508 141 UNITED STATES TAX COURT REPORTS (507)

returns of Vibo Corp., d.b.a. General Tobacco, Inc. (Vibo), 1 an
S corporation, because pursuant to section 1366 2 all of the
deductions and losses of Vibo properly passed through to
petitioner as the sole shareholder during each of the tax
years in issue.
The issues in dispute concern Vibo’s accrual of unpaid
obligations incurred when it settled with 46 States, the Dis-
trict of Columbia, the Commonwealth of Puerto Rico, and 4
U.S. territories (collectively, settling States) by entering into
the Tobacco Master Settlement Agreement (MSA). After
respondent’s concession, 3 the issues for decision are:
(1) whether Vibo properly deducted its MSA payment
obligations under section 461(h) before those obligations were
actually paid into the MSA escrow account established at
Citibank. We hold that it did not;
(2) whether accrued interest owed into a qualified settle-
ment fund is deductible in the tax year before actual pay-
ment is made. We hold that it is not; and
(3) whether adjustments to income or tax should be made
with respect to petitioner’s 2004 and 2006 Forms 1040, U.S.
Individual Income Tax Return, as a result of the adjustments
made to Vibo’s 2004–06 Forms 1120S, U.S. Income Tax
Return for an S Corporation. We hold that they should be
made.
FINDINGS OF FACT

Some of the facts have been stipulated for trial under Rule
91. The stipulation of facts and the attached exhibits are
incorporated by this reference and are found accordingly.
1 General Tobacco, Inc., is another subch. S corporation wholly owned by

petitioner during the years in issue that was incorporated in the State of
Florida on July 6, 2000. Because General Tobacco is the ‘‘d.b.a. name’’ of
Vibo, and the parties use these two names interchangeably, we will refer
to them collectively as Vibo throughout this Opinion to alleviate any confu-
sion.
2 Unless otherwise indicated, all section references are to the Internal

Revenue Code (Code) in effect for the years in issue, and all Rule ref-
erences are to the Tax Court Rules of Practice and Procedure.
3 Respondent concedes that petitioner reasonably and in good faith relied

upon tax professionals in reporting Vibo’s deductions of $302,221,719 for
the 2004 tax year and thus is not liable for any accuracy-related penalty
under sec. 6662(a). Respondent did not determine a sec. 6662 penalty for
the 2006 tax year.

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 (507) SURIEL v. COMMISSIONER 509

I. Background
Respondent mailed a notice of deficiency to petitioner on
October 6, 2011. Petitioner timely filed his petition with this
Court on January 4, 2012. At the time the petition was filed,
petitioner was a resident of Miami, Florida. The parties have
stipulated that venue for purposes of an appeal is in the
Court of Appeals for the Eleventh Circuit.
A. Vibo
Vibo, a Florida corporation, began to sell cigarettes in the
United States in 1999. During 2000–2006, Vibo was taxed
under subchapter S and wholly owned by petitioner. Vibo
was an accrual method taxpayer during the tax years 2004–
06. For each of the tax years in issue, Vibo filed a Form
1120S. During the tax years at issue, Vibo did not own any
cigarette manufacturing or packaging equipment.
B. Protabaco
Productora Tabacalera De Colombia S.A. (Protabaco), a
Colombian company, is unrelated to petitioner by ownership.
During the tax years in issue, Protabaco was in the business
of manufacturing tobacco products. During the tax years in
issue, Protabaco was the fabricator of Vibo’s cigarettes. As
part of its entry into the MSA, Vibo entered into an exclusive
manufacturing and distribution agreement with Protabaco,
whereby Vibo appointed Protabaco as its exclusive manufac-
turer and Protabaco appointed Vibo its exclusive importer.
II. Tobacco Master Settlement Agreement (MSA)
A. Background
Before the MSA was executed various States either had
commenced or were expected to commence litigation in order
to assert claims for monetary, equitable, and injunctive relief
against certain tobacco product manufacturers and other
defendants for damages under State laws. Relief and dam-
ages were sought under State laws such as consumer protec-
tion or antitrust in order to further the States’ policies
regarding public health, including policies to reduce smoking
by youth. The central purpose of the MSA was to reduce
smoking—particularly youth smoking—in the United States.

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On November 23, 1998, the MSA execution date, four
tobacco product manufacturers (TPMs) entered into the MSA
with representatives (the NAAG) 4 from the settling States.
The four manufacturers were Brown & Williamson Tobacco
Corp., Lorillard Tobacco Co., Phillip Morris, Inc., and R.J.
Reynolds Tobacco Co. The settling States included 46 States,
the District of Columbia, the Commonwealth of Puerto Rico,
and 4 U.S. territories.
A TPM as defined in the MSA is an entity that after the
MSA execution date directly (and not exclusively through
any affiliate):
(1) manufactures Cigarettes anywhere that such manufacturer intends
to be sold in the States, including cigarettes intended to be sold in the
States through an importer * * *;
(2) is the first purchaser anywhere for resale in the States of cigarettes
manufactured anywhere that the manufacturer does not intend to be
sold in the States; or
(3) becomes a successor of an entity described in subsection (1) or (2)
above.

Amendment No. 24 (amendment 24) to the MSA provides:
In addition, and in consideration for the above, * * * [Vibo] shall be
considered to be a * * * [TPM] and a Participating Manufacturer, and
Protabaco shall not be considered to be a * * * [TPM].

A participating manufacturer as defined in the MSA is a
TPM that is or becomes a signatory to the MSA, provided
that: (1) in the case of a TPM that is not an original partici-
pating manufacturer (OPM) (i.e., in Vibo’s case), that TPM is
bound by the MSA in all settling States in which the MSA
binds OPMs, and (2) in the case of a TPM that signs the
MSA after the MSA execution date (i.e., also in Vibo’s case),
that TPM, within a reasonable time after signing the MSA,
makes any payments that it would have been obligated to
make in the intervening period had it been a signatory as of
the MSA execution date.
Under the MSA, the settling States released a partici-
pating manufacturer from all past and future tobacco-related
claims that the States might have against that company,
when the participating manufacturer became a signatory to
4 The National Association of Attorneys General (NAAG) is an associa-

tion of U.S. attorneys general whose tobacco project’s mission is to support
the States in enforcing, defending, and administering the MSA.

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the MSA. The MSA specifies two types of participating
manufacturers: an OPM and a subsequent participating
manufacturer (SPM). The OPMs consisted of the four TPMs,
discussed supra, that signed the MSA on the MSA execution
date. An SPM is a TPM (other than an OPM) that: (1) is a
participating manufacturer and (2) is a signatory to the
MSA, regardless of when that TPM became a signatory to
the MSA.
In consideration for the released claims, the participating
manufacturers were required to make MSA payments to the
settling States in order to promote educational programs tai-
lored to preventing smoking and to compensating the States
for healthcare costs incurred from the effects of smoking and
tobacco use. Both the released claims and the MSA payments
will be discussed in turn.
B. Released Claims
Section XVIII(d) of the MSA provides: ‘‘All payments to be
made by the Participating Manufacturers pursuant to this
Agreement are in settlement of all of the settling States’
antitrust, consumer protection, common law negligence,
statutory, common law and equitable claims for monetary,
restitutionary, equitable and injunctive relief alleged by the
settling States with respect to the year of payment or earlier
years’’.
C. MSA Payments
Section IX(a) of the MSA, titled ‘‘Payments’’, provides that
all payments made pursuant to the MSA (except those not at
issue in this case) shall be made into escrow pursuant to the
escrow agreement. The second and third sentences of section
6 of the escrow agreement provide:
The escrow established pursuant to this Escrow Agreement is intended
to be treated as a Qualified Settlement Fund for Federal tax purposes
pursuant to Treas. Reg. § 1.468B–1. The Escrow Agent shall comply with
all applicable tax filing, payment and reporting requirements, including,
without limitation, those imposed under Treas. Reg. § 1.468B * * *.

The OPMs and SPMs are required under the MSA to make
their payments to the settling States into an escrow fund.
The parties stipulate that the MSA escrow fund is a qualified
settlement fund under section 1.468B–1, Income Tax Regs.

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The escrow fund was established with Citibank, N.A., which
served as the escrow agent.
III. Pre-MSA
Tobacco manufacturers that do not join the MSA are
known as nonparticipating manufacturers (NPMs). The MSA
directed each settling State to enact legislation that would
require an NPM to make deposits into an escrow account to
satisfy any judgments that a particular State might bring
against the NPM in that particular State. These statutes
required an NPM to make annual deposits into State escrow
accounts for each State where the NPM sold its tobacco prod-
ucts. The escrow payment amounts were based on each com-
pany’s sales in the respective State.
The exclusive manufacturing and distribution agreement
states in its recitals:
WHEREAS, manufacturers of cigarettes sold in the United States are
obligated under the laws of various U.S. states to either (i) join the
* * * [MSA] or (ii) to establish and contribute funds to designated
escrow accounts, which funds are intended to be made available for the
settlement of tobacco-related litigation that may be brought against such
cigarette manufacturers by authorities in those U.S. states;

Because Protabaco manufactured cigarettes that were sold in
the United States, it had an obligation to either join the MSA
or contribute to the NPM escrow accounts, of which it chose
the latter. Protabaco’s name was on the NPM escrow
accounts, but Vibo made the account contributions. Once
Protabaco chose the NPM route, there was no obligation to
later join the MSA.
The NPM escrow statutes, as originally enacted by the set-
tling States, contained an unintended loophole that gave
NPMs an unfair competitive advantage over TPMs partici-
pating in the MSA. To close this statutory loophole, in late
2003 the NAAG adopted a resolution supporting allocable
share legislation, which made the passage of such corrective
legislation its number one legislative effort in 2004. On
March 30, 2004, Vibo submitted to the NAAG its application
to join the MSA.
In a Federal antitrust action, Vibo sued the settling States,
the OPMs, and other SPMs in the matter of Vibo Corp. v.
Conway, 669 F.3d 675 (6th Cir. 2012). In its complaint, Vibo
alleged that the MSA violated its constitutional rights and

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imposed an unreasonable restraint on trade in violation of
antitrust laws and that it was fraudulently induced by the
settling States to join the MSA. Vibo’s claims were dismissed
and judgment was entered in favor of the defendants.
Vibo further alleged that the settling States’ amendment of
their escrow statutes made it increasingly difficult for Vibo
to continue in business under the obligation of making NPM
contributions. Vibo also stated that it came to understand
that the only effective means to reach the vast majority of
the national cigarette market was to join the MSA because
most retail chains wanted the liability release afforded by
the MSA to participating manufacturers and refused to carry
Vibo products without it. That complaint was verified by J.
Ronald Denman, Vibo’s vice president and general counsel.
The exclusive manufacturing and distribution agreement
petitioner signed states: ‘‘[Vibo] has agreed to make a consid-
erable long term investment wherein it has obligated itself to
make payments to the States * * * in order that it may
become a signatory to the MSA, with the expectation of
gaining a considerable increase in market share for the
[Vibo] Cigarettes’’.
IV. Entering Into the MSA
Before Vibo entered into the MSA, it fulfilled all of the
NPM escrow statute deposit requirements. On August 19,
2004, effective as of July 1, 2004, petitioner executed the
MSA on behalf of Vibo. The first paragraph of the MSA
execution statement, which petitioner signed under oath,
states:
[the] undersigned authorized representative hereby executes the * * *
[MSA], as amended (hereafter ‘‘Agreement’’) on behalf of * * * [Vibo]
thereby becoming * * * [an SPM]. * * * [Vibo] and its authorized rep-
resentatives agree to be bound by such Agreement and to fulfill all the
obligations of a Participating Manufacturer under the Agreement,
including, but not limited to, making all payments that it would have
been obligated to make had it been a signatory as of the MSA execution
date.

As the MSA was originally drafted, only a TPM could enter
the MSA as a participating manufacturer. The MSA was
later amended by amendment 24 to allow the exclusive
importer of cigarettes manufactured by another person out-

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 514 141 UNITED STATES TAX COURT REPORTS (507)

side the United States to enter the MSA. Vibo’s application
to join the MSA was submitted on that basis. By signing and
executing amendment 24, petitioner agreed and acknowl-
edged that Vibo was liable to make the MSA payments on its
cigarettes regardless of the identity of their manufacturer.
If an NPM joined the MSA, it would become an SPM and
be subject to the MSA obligations of an SPM and a partici-
pating manufacturer. If an NPM joined the MSA more than
90 days after its execution, as Vibo did, it was required to:
(1) make payments to the States that it would have been
obligated to make had it joined the MSA in November 1998
(prior obligation); and (2) make annual payments going for-
ward based on the company’s national market share (current
obligation). Once a party becomes a signatory to the MSA, it
no longer has an NPM escrow statute deposit obligation
under a settling State’s NPM escrow statute.
According to the General Tobacco adherence agreement,
Vibo was required to make prior obligation payments based
on the amount of Federal excise taxes that it had paid for
cigarettes from January 1, 2000, through June 30, 2004. Vibo
was required to make these payments in 12 annual install-
ments from 2005 through 2016. After application of all of the
NPM escrow account amounts and other credits, the net
unpaid prior obligations totaled $242,314,534 as of June 30,
2004.
Vibo was required to make current obligation payments for
all obligations arising from its market share of cigarettes it
sold for the period July 1 through December 31, 2004, and
for all post-2004 sales. Vibo’s current obligations were pay-
able on April 15 of the year following the year in which Fed-
eral excise taxes were collected on its cigarettes. 5 Vibo’s 2004
current obligation amount due on April 15, 2005, totaled
$65,854,272. The General Tobacco adherence agreement
spells out that Vibo is the only party with MSA payment
obligations. Nothing in the MSA documents places this pay-
ment obligation on Protabaco. Protabaco was not a signatory
5 The
General Tobacco adherence agreement required Vibo to make quar-
terly payments into escrow towards its current obligations based upon a
fixed amount per cigarette. These quarterly payments were held by
SunTrust Bank in Miami, which would then transfer those funds to the
Citibank escrow account on the following April 15.

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to this agreement, the MSA execution statement, or amend-
ment 24.
Vibo had a strong economic incentive to make its prior and
current obligation payments into the MSA escrow account. If
Vibo failed to make those payments, Vibo’s cigarette brands
would end up delisted and retailers would not stock their
shelves with those brands.
V. Vibo’s Deductions
A. Cost of Goods Sold Deductions
On its 2004 Form 1120S, Vibo deducted $295,549,083 of its
MSA payment obligations (both prior and current obliga-
tions) as part of its cost of goods sold. None of this amount
was actually paid into the MSA escrow account in 2004.
On its 2006 Form 1120S, Vibo deducted $108,487,225 of its
MSA current obligation as part of its cost of goods sold. In
2006 Vibo paid $97,637,716 of its MSA current obligation.
B. Interest Deduction
On its 2004 Form 1120S, Vibo deducted $4,661,190 as
interest. This represented interest accrued on, and made part
of, Vibo’s prior obligation, for July 1 through December 31,
2004. The interest amount was calculated by and confirmed
in the letter drafted by Pricewaterhouse Coopers (PwC), the
internal auditor under the terms of the MSA. No part of the
$4,661,190 was paid in 2004, but this amount was paid on
September 1, 2005.
The PwC letter did not calculate or confirm an interest
amount attributable to the prior obligation owed for the
period January 1, 2000, through June 30, 2004.

C. Other Deduction
On its 2004 Form 1120S, Vibo deducted $2,011,446 under
‘‘Other Deductions’’, and it was specifically labeled ‘‘MSA
Obligation—Paid.’’ No part of that $2,011,446 was paid in
2004.

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OPINION

I. Burden of Proof
Generally, taxpayers bear the burden of proving, by a
preponderance of the evidence, that the determinations of the
Commissioner in a notice of deficiency are incorrect. Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Deductions are a matter of legislative grace, and a taxpayer
bears the burden of proving entitlement to any claimed
deductions. Rule 142(a)(1); INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992). Petitioner has not argued that
respondent bears the burden of proof with respect to the
issues discussed below.
II. The Danielson Rule
A. Danielson Applies
When a taxpayer casts a transaction in a certain form, the
Commissioner may bind the taxpayer to that form for tax
purposes. See Commissioner v. Danielson, 378 F.2d 771 (3d
Cir. 1967), vacating and remanding 44 T.C. 549 (1965). The
Danielson rule is a parol evidence rule applicable in Federal
tax controversies. Id. at 779. Under the Danielson rule, as
adopted by the Court of Appeals for the Third Circuit:
[A] party can challenge the tax consequences of his agreement as con-
strued by the Commissioner only by adducing proof which in an action
between the parties to the agreement would be admissible to alter that
construction or to show its unenforceability because of mistake, undue
influence, fraud, duress, etc. * * * [Id. at 775.]
The Court of Appeals for the Eleventh Circuit, to which an
appeal in the instant case would lie, see sec. 7482(b)(1)(A),
has accepted the Danielson rule, see Plante v. Commissioner,
168 F.3d 1279, 1280–1281 (11th Cir. 1999), aff ’g T.C. Memo.
1997–386; Bradley v. United States, 730 F.2d 718, 720 (11th
Cir. 1984). Accordingly, if the Danielson rule applies, we will
follow it. Golsen v. Commissioner, 54 T.C. 742, 756–757
(1970), aff ’d, 445 F.2d 985 (10th Cir. 1971).
Petitioner’s pretrial memorandum challenged the applica-
tion of Danielson. On brief, however, he agreed that the
Danielson rule applies to the MSA documents.

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B. MSA Documents
Although the parties agree that Danielson applies to the
‘‘MSA documents’’, they appear to disagree over which docu-
ments that term covers. 6 The only disagreement appears to
be whether the MSA execution statement should be included.
Because petitioner had to sign the MSA execution statement
to join the MSA, we find the execution statement to be an
integral piece of the ‘‘MSA documents’’. Accordingly, we will
use the term ‘‘MSA documents’’ to refer collectively to the fol-
lowing documents: the MSA, amendment 24, the MSA execu-
tion statement, the exclusive manufacturing and distribution
agreement, and the General Tobacco adherence agreement.
C. Arguments
Respondent contends Vibo voluntarily entered into the
settlement with the settling States and should be bound by
the MSA documents. Consequently, respondent argues, the
regulations prohibit Vibo from deducting the MSA payment
obligations until it actually makes the payments.
Petitioner contends that Protabaco was the manufacturer
participating in the MSA, because all the documents refer to
Vibo as the importer and distributor (not the manufacturer)
and to Protabaco as the manufacturer. Consequently, peti-
tioner argues, Vibo was simply assuming Protabaco’s MSA
payment obligations as a cost of purchasing cigarettes and
the Code allows Vibo to deduct the MSA payment obligations
as an ordinary and necessary business expense or cost of
goods sold.
Before we can decide the tax consequences resulting under
the MSA documents, we must discern the operative effect of
the documents under Danielson. We begin by determining
6 Respondent’s pretrial memorandum states: ‘‘The MSA Settlement Doc-

uments include: the MSA, Amendment No. 24 to the MSA, the General To-
bacco Adherence Agreement, the Exclusive Manufacturing and Distribu-
tion Agreement, and the MSA Execution Statement.’’ However, petitioner’s
brief states: ‘‘Petitioner concedes and agrees only that the Court apply
Danielson and give effect to the clear and unambiguous terms of the ‘MSA
Documents’ as defined herein.’’ Petitioner then defines the MSA documents
to include: the MSA, amendment 24, the exclusive manufacturing and dis-
tribution agreement, and the General Tobacco adherence agreement. The
only difference between the two parties is with regard to the MSA execu-
tion statement.

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 518 141 UNITED STATES TAX COURT REPORTS (507)

Vibo’s status under the MSA vis-a-vis its relationship to
Protabaco.
III. TPM, SPM, and Participating Manufacturer
A. Tobacco Product Manufacturer
The MSA defines a ‘‘tobacco product manufacturer’’ (TPM)
as an entity that after the MSA execution date directly (and
not exclusively through any affiliate):
(1) manufactures Cigarettes anywhere that such manufacturer intends
to be sold in the States, including cigarettes intended to be sold in the
States through an importer * * *;
(2) is the first purchaser anywhere for resale in the States of cigarettes
manufactured anywhere that the manufacturer does not intend to be
sold in the States; or
(3) becomes a successor of an entity described in subsection (1) or (2)
above.

Amendment No. 24 to the MSA provides:
In addition, and in consideration for the above, * * * [Vibo] shall be
considered to be a * * * [TPM] and a Participating Manufacturer, and
Protabaco shall not be considered to be a * * * [TPM].

Petitioner contends that Vibo was not a TPM under the
original draft of the MSA, and only TPMs were allowed to
enter the MSA. The parties agree Vibo was not an actual
manufacturer or fabricator of any cigarettes during the rel-
evant periods. However, amendment 24 classifies Vibo as a
TPM and explicitly allows the exclusive importer of foreign
cigarettes to enter the MSA.
On brief petitioner quoted portions of section (A)(1) and (2)
of amendment 24 to support his argument that Vibo is not
a TPM. That section states, in part, that Vibo agrees and
acknowledges (1) that it is the sole importer and distributor
in the United States of all cigarettes manufactured by
Protabaco and (2) that Protabaco is the sole manufacturer of
any cigarettes owned or licensed by Vibo or Protabaco. How-
ever, petitioner failed to include the portions of that section
that cuts against his argument. Both parts end with the
phrase ‘‘subject to the terms of this Amendment.’’ This
phrase is important, because as quoted above, the amend-
ment provides in section (B) that ‘‘[Vibo] shall be considered
to be a * * * [TPM] and a Participating Manufacturer, and
Protabaco shall not be considered to be a * * * [TPM]’’.

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Petitioner also points to section (D) of amendment 24 to
support his argument that Vibo is not a TPM. Section (D)
states: ‘‘If * * * [Vibo] creates or acquires its own manufac-
turing facility, it shall assume all responsibilities as the
* * * [TPM] of such Cigarettes under the MSA.’’ Petitioner
interprets this statement to mean that Vibo will be consid-
ered a TPM only if it creates or acquires its own manufac-
turing facilities. We disagree. We interpret the statement to
mean that if Vibo creates or acquires its own manufacturing
facility, Vibo will be considered the TPM of the cigarettes
manufactured at the new facility. The statement is not rel-
evant to Vibo’s TPM status with respect to the cigarettes
Protabaco manufactured.
Finally, petitioner also relies on provisions in the exclusive
manufacturing and distribution agreement to show that Vibo
was not a manufacturer. First, petitioner points to the
recitals, which describe Vibo as an ‘‘importer and dis-
tributor’’. 7 Second, he cites a portion of the agreement in
which Vibo appoints Protabaco as its exclusive manufacturer,
and Protabaco appoints Vibo as its exclusive importer. How-
ever, as we noted above, under amendment 24 an exclusive
importer (Vibo) of cigarettes fabricated by another party
(Protabaco) outside the United States could apply to partici-
pate in the MSA. Vibo’s application to join the MSA was in
fact submitted on that basis. Accordingly, we are not per-
suaded that Vibo was incapable of being a TPM under the
MSA merely because it did not actually manufacture ciga-
rettes. We find that Vibo was a TPM under the MSA as it
contractually agreed, and as the MSA permits by amend-
ment.

7 The three recitals as quoted on brief are as follows:

‘‘WHEREAS, Protabaco has engaged in the business of manufacturing to-
bacco products ’’. (Emphasis added.)
‘‘WHEREAS, * * * [Vibo] is a[n] * * * importer and distributer of ciga-
rettes.’’ (Emphasis added.)
‘‘WHEREAS, Protabaco presently manufactures * * * [Vibo’s] cigarettes
* * * and * * * [Vibo] * * * purchases such cigarettes for distribution in
the United States.’’ (Emphasis added.)

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B. Legal Fiction
Petitioner contends that Vibo’s position as a TPM is illu-
sory, because amendment 24 deems Vibo a TPM merely to
allow Vibo to assume Protabaco’s MSA payment obligation. If
amendment 24 had not deemed Vibo a TPM, then Vibo could
not have joined the MSA. Petitioner argues that Vibo’s TPM
status is a legal fiction and that Vibo has actually agreed to
make the MSA payments for Protabaco as part of Vibo’s pur-
chase price for cigarettes.
We reject petitioner’s contention for two reasons. First,
Protabaco did not sign any of the MSA documents except for
the exclusive manufacturing and distribution agreement,
which merely appointed Protabaco as Vibo’s exclusive manu-
facturer. Second, as discussed infra, Vibo obligated itself
under the MSA for its own liabilities; Protabaco had no MSA
liability for Vibo to assume.

C. Subsequent Participating Manufacturer and Participat-
ing Manufacturer
Respondent contends that Vibo not only became a TPM by
entering the MSA, but it also became an SPM and a partici-
pating manufacturer as defined by the MSA’s terms. We
agree. The first paragraph of the MSA execution statement
provides:
The undersigned authorized representative hereby executes the * * *
[MSA], as amended (hereafter ‘‘Agreement’’) on behalf of * * * [Vibo]
* * * thereby becoming a Subsequent Participating Manufacturer. * * *
[Vibo] * * * and its authorized representatives agree to be bound by
such Agreement and to fulfill all the obligations of a Participating Manu-
facturer under the Agreement, including, but not limited to, making all
payments that it would have been obligated to make had it been a signa-
tory as of the MSA execution date. [Emphasis added.]

Petitioner, as president of Vibo, signed this statement under
oath. Also, amendment 24 specifically states: ‘‘[Vibo] shall be
considered to be a * * * Participating Manufacturer’’.
The MSA defines a participating manufacturer as a TPM
that is or becomes a signatory to the MSA, provided that: (1)
in the case of a TPM that is not an OPM (e.g., in Vibo’s case),
that TPM is bound by the MSA in all settling States in
which the MSA binds OPMs and (2) in the case of a TPM
that signs the MSA after the MSA execution date (e.g., also

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 (507) SURIEL v. COMMISSIONER 521

in Vibo’s case), that TPM, within a reasonable time after
signing the MSA, makes any payments that it would have
been obligated to make in the intervening period had it been
a signatory as of the MSA execution date.
By signing the MSA execution statement, Vibo agreed ‘‘to
be bound by * * * [the MSA] and fulfill all the obligations
of a participating manufacturer under the Agreement’’. The
MSA binds Vibo in each settling State in which it binds the
OPMs. Therefore, Vibo satisfies the first requirement.
Vibo signed the MSA after the MSA execution date of
November 23, 1998, and made its first prior obligation
installment payment in 2005 in accordance with the General
Tobacco adherence agreement. Therefore, Vibo also satisfies
the second requirement.
The MSA generally defines an SPM as a TPM that: (1) is
a participating manufacturer, and (2) is a signatory to the
MSA. As we noted above, Vibo has satisfied both of these
requirements as well.
The General Tobacco adherence agreement and the exclu-
sive manufacturing and distribution agreement further dem-
onstrate that Vibo obligated itself under the MSA as an
SPM. Although we do not accord ‘‘whereas clause’’ recitals
the weight of operative terms in an agreement, they can aid
interpretation of that agreement. See, e.g., Grynberg v.
FERC, 71 F.3d 413, 416 (D.C. Cir. 1995) (‘‘[I]t is standard
contract law that a Whereas clause, while sometimes useful
as an aid to interpretation ‘cannot create any right beyond
those arising from the operative terms of the document.’ ’’
(quoting Abraham Zion Corp. v. Lebow, 761 F.2d 93, 103 (2d
Cir. 1985))).
In relevant part, the General Tobacco adherence agree-
ment states: ‘‘WHEREAS, * * * [Vibo] wishes to become
* * * [an SPM] under the * * * [MSA] * * * and filed its
application therefor’’. Also in relevant part, the exclusive
manufacturing and distribution agreement states:
‘‘WHEREAS, * * * [Vibo] has agreed to make a considerable
long term investment wherein it has obligated itself * * * as
* * * [an SPM], in order that it may become a signatory to
the MSA’’.
Accordingly, we find that Vibo contractually obligated itself
as an SPM and participating manufacturer and had the
rights and obligations commensurate with that designation.

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Having determined Vibo’s status as a TPM, an SPM, and
a participating manufacturer under the MSA documents, we
next address petitioner’s assumption of liability argument.

IV. Assumption of Liability
A. Arguments
Petitioner contends that Vibo entered into the MSA at
Protabaco’s request to make the MSA payments on behalf of
Protabaco as part of Vibo’s purchase price for cigarettes.
Respondent argues that Protabaco had no liability under the
MSA, so Vibo could not assume its liability.

B. Whether Protabaco Has MSA Liability To Assume
1. Pre-MSA Arrangement
Petitioner argues that Protabaco was liable for the MSA
payments, because State laws required Protabaco to either
join the MSA or contribute to the NPM escrow accounts.
Protabaco’s name was on the NPM escrow accounts, but Vibo
made the account contributions. Petitioner argues this as evi-
dence of an ongoing assumption of liability arrangement.
We agree that Protabaco had an obligation to either join
the MSA or contribute to the NPM escrow accounts, of which
it chose the latter. We also agree that Vibo made the con-
tributions to the NPM escrow accounts. However, that does
not mean Protabaco continued to be the liable party after
Vibo entered into the MSA. Once Protabaco chose the NPM
route, it had no obligation to later join the MSA. As we will
discuss, we are not convinced that Protabaco forced Vibo to
join the MSA. We find that Vibo entered into the MSA volun-
tarily.
While it may have been possible for Protabaco to settle
with the settling States and then pass on the MSA costs to
Vibo in the form of increased prices, that did not happen.
Petitioner must be taxed in accordance with the transaction
he and Vibo consummated, not a transaction he might have
consummated but did not. See Commissioner v. Nat’l Alfalfa
Dehydrating & Milling Co., 417 U.S. 134, 148–149 (1974)
(‘‘[W]hile a taxpayer is free to organize his affairs as he
chooses, nevertheless, once having done so, he must accept
the tax consequences of his choice, whether contemplated or

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 (507) SURIEL v. COMMISSIONER 523

not, and may not enjoy the benefit of some other route he
might have chosen to follow but did not.’’ (Citation omitted.)).
Moreover, nothing in the MSA documents creates any
Protabaco liability that Vibo could assume. As discussed
supra, the MSA documents clearly show that Vibo obligated
itself to make the MSA payments. By signing and executing
amendment 24, petitioner agreed that Vibo alone was liable
for the MSA payments on its cigarettes regardless of the
identity of the manufacturer. 8 Therefore, we find that
Protabaco had no liability under the MSA for Vibo to
assume.
Petitioner cites the General Tobacco adherence agreement
as further evidence that Vibo assumed Protabaco’s liability.
Under that agreement, Vibo received credit against its MSA
payment obligations for a portion of the NPM escrow pay-
ments it made on behalf of Protabaco. Petitioner argues that
this simply bridges the gap to continue the prior arrange-
ment under which Vibo paid Protabaco’s obligations.
Petitioner’s argument does not convince us that Vibo
assumed Protabaco’s liability. Under the MSA, if a TPM
joined the MSA more than 90 days after the MSA execution
date (as Vibo did), it was required to make payments—
known as the prior obligation—to the States that it would
have been obligated to make had it joined the MSA in
November 1998. Because the prior obligation relates to the
same cigarettes for which Vibo made the NPM payments in
those earlier years, and the effect of the payments to both
the MSA and NPM escrow accounts was the same, it makes
sense economically that Vibo would receive credit for its
NPM escrow contributions. Nothing about the credit gives
rise to the legal effect of an assumption-of-liability arrange-
ment.
Moreover, the General Tobacco adherence agreement
makes clear that Vibo alone is obligated to make the MSA
payments—both prior and current. Nothing in the agreement
8 See amend. 24, sec. A(3):
[Vibo] shall be responsible for all payments under the MSA for all Ciga-
rettes manufactured by Protabaco * * *, as well as all Cigarettes sold
under any Brand Name that is, or has been, or will be, owned or li-
censed by * * * [Vibo] * * * regardless of the identity of the manufac-
turer, including Cigarettes sold prior to the date of this Amendment.

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 524 141 UNITED STATES TAX COURT REPORTS (507)

suggests that Vibo agreed to undertake those obligations as
part of its purchase of cigarettes from Protabaco. Protabaco
was not even a signatory to that agreement, amendment 24,
or the MSA execution statement. On these facts, we find that
Vibo did not assume Protabaco’s MSA payment obligations as
part of its purchase of cigarettes. Rather, Vibo’s liability
arose when it contractually agreed with the settling States to
be obligated under the MSA.
2. Quarterly Report Requirement
The exclusive manufacturing and distribution agreement
requires Vibo to provide reports to Protabaco regarding its
payment of current MSA obligations and its ability to make
future payments. 9 Petitioner argues that this arrangement
indicates an assumption-of-liability arrangement between
Vibo and Protabaco. We disagree, because other plausible
explanations for the reporting requirement exist.
Protabaco has an interest in Vibo’s ability to meet its MSA
obligations regardless of whether Vibo assumed Protabaco’s
liability. If Vibo failed to make the necessary MSA payments,
Vibo’s cigarette brands would end up delisted and retailers
would not stock their shelves with those brands. Therefore,
Protabaco had a vested interest in ensuring that Vibo could
make its MSA payments, because nonpayment could lead to
Vibo’s importing fewer (or no) cigarettes from Protabaco.
3. Reason for Entering Into the MSA
Petitioner contends that Vibo entered into the MSA on
behalf of Protabaco at Protabaco’s request. However, the evi-
dence indicates that financial considerations led Vibo to
enter into the MSA voluntarily.
The NPM escrow statutes, as originally enacted by the set-
tling States, contained an unintended loophole that gave
NPMs an unfair competitive advantage over TPMs partici-
pating in the MSA. Congress closed the loophole in 2004, and
Vibo submitted its application that year.
9 Under the heading ‘‘MSA Obligations’’, the agreement states: ‘‘[Vibo]

agrees to provide Protabaco with: (i) a quarterly report setting forth in de-
tail the amount necessary for * * * [Vibo] to have available to make its
MSA payments due each quarter, and (ii) documentation reflecting * * *
[Vibo’s] quarterly deposit requirements pursuant to its MSA Adherence
Agreement.’’

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 (507) SURIEL v. COMMISSIONER 525

The exclusive manufacturing and distribution agreement
petitioner signed states: ‘‘[Vibo] has agreed to make a consid-
erable long term investment wherein it has obligated itself to
make payments to the States * * * in order that it may
become a signatory to the MSA, with the expectation of
gaining a considerable increase in market share for the * * *
[Vibo] Cigarettes’’. (Emphasis added.)
In a Federal antitrust action, Vibo filed a verified amended
complaint, arguing that the settling States’ amendment of
their escrow statutes made it increasingly difficult for Vibo
to continue in business under the obligation of making NPM
contributions. 10 The complaint also stated that Vibo came to
understand that the only effective means to reach the
national cigarette market was to join the MSA because most
retail chains wanted the liability release afforded by the
MSA to participating manufacturers and refused to carry
Vibo products without it. Vibo’s vice president and general
counsel, Mr. Denman, verified the complaint.
On cross-examination before this Court, Mr. Denman testi-
fied that the statements in the complaint were accurate but
that Vibo ultimately entered into the MSA ‘‘because
Protabaco gave * * * [Vibo] no alternative.’’ This testimony
without more does not outweigh the evidence that Vibo vol-
untarily entered into the MSA after carefully considering the
financial impact of its decision.
Petitioner did not offer testimony from any Protabaco rep-
resentatives to corroborate Mr. Denman’s statements. The
failure to call a representative of Protabaco at trial gives rise
to the adverse inference that had such a witness been pro-
duced, his or her testimony would not support petitioner’s
contentions. See Wichita Terminal Elevator Co. v. Commis-
sioner, 6 T.C. 1158, 1165 (1946), aff ’d, 162 F.2d 513 (10th
Cir. 1947). Vibo had significant business reasons for joining
the MSA, and Mr. Denman’s self-serving testimony alone
does not convince us that Protabaco forced Vibo to join. See
Broz v. Commissioner, 137 T.C. 46, 59 (2011) (‘‘We need not
accept the taxpayer’s self-serving testimony when the tax-
payer fails to present corroborative evidence.’’); Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986).
10 Verified Amended Complaint at 53, Vibo Corp. v. Conway, 594 F.

Supp. 2d 758 (W.D. Ky. 2009), aff ’d, 669 F.3d 675 (6th Cir. 2012).

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 526 141 UNITED STATES TAX COURT REPORTS (507)

Accordingly, we reject petitioner’s argument that Vibo
entered into the MSA at Protabaco’s request.

V. Deductions
A. The Law
Section 162(a) allows taxpayers to deduct all ordinary and
necessary business expenses they pay or incur during the
taxable year in carrying on any trade or business. Section
461(a) provides that any deduction ‘‘shall be taken for the
taxable year which is the proper taxable year under the
method of accounting used in computing taxable income.’’
During the years at issue, Vibo was an accrual method tax-
payer. Under the accrual method of accounting, taxpayers
record liabilities as they are incurred. A taxpayer incurs a
liability in the taxable year in which (1) all the events have
occurred that establish the fact of the liability, (2) the
amount of the liability can be determined with reasonable
accuracy, and (3) economic performance has occurred with
respect to the liability. Sec. 1.461–1(a)(2), Income Tax Regs.;
see sec. 461(h)(1), (4).
Conditions (1) and (2) together compose what is known as
the ‘‘all events’’ test. Sec. 461(h)(4). Section 461(h)(1) modifies
the all events test, providing that ‘‘the all events test shall
not be treated as met any earlier than when economic
performance with respect to such item occurs.’’ Therefore, we
must first determine if and when economic performance
occurred. If petitioner failed to satisfy the economic perform-
ance requirement, we need not address the all events test.
B. Economic Performance
Section 461(h)(2) determines the timing of economic
performance according to the source of the liability. The par-
ties disagree over the source of the MSA payment obligation.
Petitioner argues that the obligation arose from the provision
of property to Vibo from another person (Protabaco) and
therefore economic performance occurred as Protabaco pro-
vided cigarettes to Vibo. See sec. 461(h)(2)(A)(ii). Respondent
argues that Vibo was required to make the MSA payments
to a qualified settlement fund (QSF), and therefore economic
performance does not occur until Vibo actually makes the
payments. See sec. 468B(a) (‘‘For purposes of section 461(h),

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 (507) SURIEL v. COMMISSIONER 527

economic performance shall be deemed to occur as qualified
payments are made by the taxpayer to a designated settle-
ment fund.’’); sec. 1.468B–3(c)(1), Income Tax Regs.
1. Property Provided to Vibo
As stated above, we are not convinced that Vibo made the
MSA payments on behalf of Protabaco as a cost of purchasing
manufactured cigarettes. Therefore, we do not apply section
461(h)(2)(A), because it determines the timing of economic
performance only when the liability arises from services or
property provided to the taxpayer.
Petitioner argues that although a QSF received Vibo’s pay-
ments, and despite section 468B(a), we should focus our
inquiry on what the payment was for and not necessarily to
whom it was made. In his view, the QSF is nothing more
than a straw man. Petitioner relies on two items to make his
argument: (1) Priv. Ltr. Rul. 9852037 (Dec. 25, 1998), which
ignored the fact that a taxpayer was making payments to a
QSF, and (2) IES Indus., Inc. v. United States, 253 F.3d 350
(8th Cir. 2001).
A private letter ruling (PLR) can be relied upon only by the
taxpayer to whom the ruling is addressed; however, ‘‘rulings
do reveal the interpretation put upon the statute by the
agency charged with the responsibility of administering the
revenue laws.’’ Hanover Bank v. Commissioner, 369 U.S. 672,
686 (1962). The Internal Revenue Service limited its ruling
in Priv. Ltr. Rul. 9852037 to the specific facts and cir-
cumstances of that case, and the facts in that ruling bear no
resemblance to the facts before this Court. Accordingly, Priv.
Ltr. Rul. 9852037 has no value in this proceeding.
Petitioner cites IES Indus. as an example of an accrual
basis taxpayer properly deducting a payment to the Govern-
ment when accrued and not when paid because the payment
was deemed to be for the provision of services. However, IES
Indus. is distinguishable from this case.
In IES Indus., the payment obligation arose out of the
provision of services to the taxpayer. The U.S. Government
provided uranium enrichment services to the taxpayer. The
taxpayer then made payments into a fund for the decon-
tamination and decommissioning of uranium enrichment
plants. The extent of the taxpayer’s use of the uranium

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 528 141 UNITED STATES TAX COURT REPORTS (507)

enrichment services determined the amounts of the pay-
ments.
Petitioner equates the payments in IES Indus. with the
payments here, because both arose from the taxpayers’
receipt of services or property. Petitioner argues that the
MSA payment obligations arose out of Protabaco’s provision
of cigarettes to Vibo, and IES’ obligations arose out of the
Government’s provision of uranium enrichment services to
IES. Section 461(h)(2)(A) fixes the timing of economic
performance for liabilities arising from the provision of both
services and property. Thus, petitioner argues that we should
find IES Indus. instructive on why economic performance
occurred here when Vibo received the cigarettes. We do not
agree.
In IES Indus., the taxpayer’s obligation depended on the
amount of uranium enrichment services the taxpayer
received. The U.S. Government provided the services and
assessed payment obligations based on the extent of the serv-
ices IES used. Here the MSA calculated a current obligation
based on Vibo’s share of the cigarette market, not the
number of cigarettes Vibo received. Similarly, the MSA cal-
culated a prior obligation based on the Federal excise taxes
that Vibo had paid for cigarettes sold in the U.S. before
joining the MSA. Protabaco could have provided an infinite
number of cigarettes to Vibo, but without subsequent sales
Vibo would have owed nothing to the MSA. The facts in IES
Indus. also differ from those here in that IES was not
making payments into a QSF.
The Code and the regulations contain specific rules for
determining the timing of economic performance for pay-
ments made to QSFs. We discuss the effect of those rules
below.
2. Qualified Settlement Fund
The parties have stipulated that the MSA escrow account
is a QSF for Federal tax purposes. Section 1.468B–3(c),
Income Tax Regs., provides that ‘‘economic performance
occurs with respect to a liability described in § 1.468B–
1(c)(2) * * * to the extent the transferor makes a transfer to
a * * * [QSF] to resolve or satisfy the liability.’’ Section
1.468B–1(c)(2), Income Tax Regs., describes several types of
liabilities for which a QSF can be established, including

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 (507) SURIEL v. COMMISSIONER 529

those arising out of tort, breach of contract, or violation of
law.
3. Tort, Breach of Contract, or Violation of Law
Respondent argues that Vibo’s MSA payment obligation
arose out of claims asserting liability for tort, breach of con-
tract, or violation of law and that section 1.468B–1(c)(2),
Income Tax Regs., should accordingly apply. Petitioner dis-
agrees, because Vibo has not engaged in tortious conduct and
has never been sued for injuries with respect to its tobacco
products by the attorney general of any State that is a party
to the MSA. Petitioner’s argument fails, because nothing in
the regulation requires a claim to have been brought against
Vibo specifically. It simply requires that the fund be estab-
lished for the satisfaction of claims that may result from an
event that has occurred and given rise to a claim asserting
liability arising out of tort or violation of law.
The MSA was made by the settling States’ representatives
and the participating manufacturers ‘‘to settle and resolve
with finality all Released Claims against the Participating
Manufacturers and related entities as set forth * * *
[therein].’’ The very first recital of the MSA states that more
than 40 States have commenced litigation asserting various
claims for monetary, equitable, and injunctive relief against
certain TPMs and others as defendants. The second recital
explains that those States sought to obtain equitable relief
and damages under State laws, including consumer protec-
tion and/or antitrust laws. The final recital says the settling
States and the participating manufacturers wish to avoid the
further expense and burden of continued litigation and have
agreed to settle their respective lawsuits and potential
claims. The MSA further states that in consideration of the
payments made by the participating manufacturers and the
release and discharge of all claims by the settling States, the
parties enter into and memorialize the agreement.
Section XVIII(d) of the MSA, titled ‘‘Payments in Settle-
ment’’, provides as follows:
All payments to be made by the Participating Manufacturers pursuant
to this Agreement are in settlement of all of the Settling States’ anti-
trust, consumer protection, common law negligence, statutory, common
law and equitable claims for monetary, restitutionary, equitable and

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 530 141 UNITED STATES TAX COURT REPORTS (507)

injunctive relief alleged by the Settling States with respect to the year
of payment or earlier years * * *. [Emphasis added.]
Under Danielson, we must give great weight to the explicit
and unambiguous terms of the MSA documents in deter-
mining the tax consequences of this arrangement. The
explicit and unambiguous terms of the MSA documents
indicate that the fund was established to satisfy claims that
may result from an event that has occurred and given rise
to a claim asserting liability arising out of tort or violation
of law. Consequently, under section 1.468B–3(c)(1), Income
Tax Regs., economic performance with respect to the MSA
obligation could not occur until Vibo transferred funds to the
QSF.
C. Cost of Goods Sold Deductions
On its 2004 Form 1120S, Vibo deducted $295,549,083 of its
MSA payment obligations—both prior and current—as part
of its cost of goods sold. None of this amount was actually
paid into the QSF in 2004, so economic performance did not
occur. Thus petitioner improperly deducted the expenses, and
we sustain respondent’s disallowance of this deduction.
On its 2006 Form 1120S, Vibo deducted $108,487,225 of its
MSA current obligation as part of its cost of goods sold. In
2006 Vibo paid $97,637,716 of its MSA current obligation.
Therefore, only $97,637,716 of its deduction was proper.
D. Interest Deductions
Petitioner argues that Vibo is entitled to deduct all interest
that accrued on the MSA liabilities. Petitioner specifically
argues for two interest deductions: (1) the $4,661,190 claimed
on Vibo’s 2004 Form 1120S and (2) an additional $6,164,475
deduction for interest that accrued on the prior obligation
but was included in the principal portion of the prior obliga-
tion under the General Tobacco adherence agreement.
Petitioner argues that section 461(h)(2) does not specifi-
cally address interest, so section 461(h)(2)(D), labeled ‘‘other
items’’, controls. Section 461(h)(2)(D) provides that in the
case of any other liability not addressed in section 461(h)(2),
economic performance occurs at the time determined under
the regulations. Petitioner then cites section 1.461–4(e),
Income Tax Regs., which states: ‘‘In the case of interest, eco-
nomic performance occurs as the interest cost economically

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 (507) SURIEL v. COMMISSIONER 531

accrues, in accordance with the principles of relevant provi-
sions in the Code.’’
1. Claimed Interest Deduction
On its 2004 Form 1120S Vibo deducted $4,661,190 as
interest accrued on its unpaid prior obligation for July 1
through December 31, 2004. Respondent determined that
Vibo deducted the expense prematurely and denied the
deduction.
The issue here is whether economic performance occurred
with respect to Vibo’s accrued interest on the prior obligation
by the time Vibo deducted it on its 2004 return. Petitioner
argues that it did and cites section 1.461–4(e), Income Tax
Regs., which provides that economic performance occurs for
interest ‘‘as the interest cost economically accrues’’. However,
section 468B(a) provides that economic performance occurs
for obligations to a QSF when the taxpayer makes the pay-
ments. The expense Vibo deducted here was both interest
and an obligation to a QSF, so we must determine which of
the conflicting rules applies. We hold that section 468B(a)
controls the timing of economic performance for all obliga-
tions to a QSF, including interest.
Congress, and the Treasury acting on Congress’ instruc-
tion, have provided comprehensive rules concerning tax-
payers’ payments to settlement funds. Those rules prevail
over more general rules that might otherwise govern the pay-
ments. See Fourco Glass Co. v. Transmirra Prods. Corp., 353
U.S. 222, 228–229 (1957); D. Ginsberg & Sons, Inc. v. Popkin,
285 U.S. 204, 208 (1932) (‘‘Specific terms prevail over the
general in the same or another statute which otherwise
might be controlling.’’). Under the specialized rules, economic
performance occurs with respect to payments made to a
settlement fund when the taxpayer makes the payments. The
rules do not differentiate between interest and principal, and
we accordingly afford them equal treatment. Vibo did not
make the interest payment on the prior obligation until 2005,
and thus, his 2004 deduction was premature. Accordingly, we
sustain respondent’s denial.
2. New Additional Interest Deduction
Petitioner raised a new argument on brief. He argues that
Vibo is entitled to an additional interest deduction of

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 532 141 UNITED STATES TAX COURT REPORTS (507)

$6,164,475. He claims that figure represents the amount of
accrued interest included in the $239,018,305 prior obligation
owed through June 30, 2004. Petitioner claims that PwC, the
internal auditor, determined the interest amount, but he has
failed to produce any evidence to support this claim. The
record contains a letter from PwC, but the letter does not
support petitioner’s contention. The letter includes the
$4,661,190 interest calculation on the current obligation, but
it does not mention anything about accrued interest on the
prior obligation.
Petitioner has provided no evidence that the initial prior
obligation included any accrued interest. Because the record
is devoid of any such evidence, petitioner raises this new
issue untimely. Accordingly, we follow our well-settled rule
that issues raised for the first time on brief will not be
considered when doing so would prevent the opposing party
from presenting evidence that might have been presented if
the issue had been timely raised. DiLeo v. Commissioner, 96
T.C. 858, 891 (1991), aff ’d, 959 F.2d 16 (2d Cir. 1992).
E. Other Deduction
On its 2004 Form 1120S Vibo deducted $2,011,446 under
‘‘Other Deductions’’ for MSA obligations. That $2,011,446
was part of the current obligation Vibo deducted in 2004 but
did not pay. In accordance with our findings above, the
$2,011,446 is not deductible for 2004, because Vibo did not
actually make the payments.
VI. Petitioner’s Individual Income Tax Adjustment
Section 1366(a) provides, generally, that income, losses,
deductions, and credits are passed through pro rata to share-
holders on their individual income tax returns. As a result of
the above findings, certain adjustments must be made to
petitioner’s 2004 and 2006 Forms 1040.
Petitioner restricted his arguments to tax consequences at
the S corporation level; he did not argue that the determina-
tions would still be in error in the event we found economic
performance occurred at the time payment was made into
the QSF. Because respondent’s determinations in the notice

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 (507) SURIEL v. COMMISSIONER 533

of deficiency are presumed correct and petitioner did not
prove they were in error, we sustain those determinations. 11
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we
conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered for respondent as
to the deficiency and for petitioner as to the
accuracy-related penalty under section
6662(a).

f

11 Because
respondent’s determinations have been sustained, pursuant to
the amendment to answer filed with this Court on January 11, 2013, peti-
tioner’s taxable income for the 2004 tax year also shall be increased by an
additional $2,491,164, resulting in an increase to the deficiency of
$871,907 for petitioner’s 2004 taxable year.

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