dissenting: The prevailing opinion denies the petitioner deductions by carrying section 24 (c) beyond its intended purpose. The petitioner is on an accrual basis. The general rule is that it is entitled to deduct items of the character involved herein when it incurs a liability to pay them and accrues them on its books. Those things all occurred in the taxable years.
Section 24 (c) is an exception to the general rule. It originally appeared as section 301 (a) of the Revenue Act of 1937, which inserted section 24 (c) of the Revenue Act of 1936. The report of the Joint Committee on Tax Evasion and Avoidance, which is dated August 5, 1937, states that the Committee had presented to it cases of artificial deductions created where the debtor kept its books and claimed deductions on an accrual basis, whereas the closely related creditor would not be required to report the items for tax purposes on the cash basis until they are actually received; the Government was delayed in getting its tax where payment in such cases was postponed for a long period of time; and the payments, if made at all, were being made in low income years, with the result that little or no tax was paid by the creditor. The Committee felt that a provision should be inserted in the law to encourage prompt payment of such obligations. The report of the Ways and Means Committee, 75th Cong., 1st sess., H. Rept. No. 1546, stated: “Under existing law, some individuals have attempted to take advantage of the difference in operation between different accounting methods of reporting income to obtain artificial deductions for interest and business expenses.” This was accomplished by not making payment to the creditor until the later, more favorable year. Section 24 (c) was recommended to prevent this abuse by requiring payment within two and one-half months after the close of the taxable year of the debtor.
The petitioner in the present case paid to its creditor, within each taxable year, more than the amount of the deductions which it is claiming and the creditor reported for that year at least the amount claimed by the debtor as deductions. Thus this creditor and this debtor during these years did not do the sort of thing that Congress was trying to stop and, under such circumstances, no such technicalities as are resorted to in the majority opinion should be used to deny the petitioner the deductions which it claims.
AruNdell, OpPERy and Johnson, JJ., agree with this dissent.