T.C. Memo. 1999-242

UNITED STATES TAX COURT

UNICO SALES & MARKETING, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1484-98. Filed July 23, 1999.

Fred A. Foley, for petitioner.

Eric R. Skinner, for respondent.

MEMORANDUM OPINION

LARO, Judge: The parties submitted this case to the Court

without trial. See Rule 122. Petitioner petitioned the Court on

January 26, 1998, to redetermine respondent's determination of

deficiencies in petitioner's Federal income tax for fiscal years

ended April 30, 1990 and 1991. Respondent determined petitioner
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must compute its income and expense on the cash receipts and

disbursements method (cash method) rather than an accrual method,

and respondent changed petitioner's method of accounting

accordingly. The resulting deficiencies in tax and additions to

tax are as follows:

Year ended Additions to tax Penalty

April 30 Deficiency Sec. 6651(a)(1) Sec. 6662(a)

 1990 $107,136 $27,454 $21,427

 1991 73,366 22,667 14,673

After concessions by the parties, we decide the following issues:

1. Whether petitioner may deduct unpaid accrued wages of

$200,000 and $18,250 for taxable years ended April 30, 1990 and

1991, respectively. We hold it may not.

2. Whether petitioner is liable for penalties for negligence

determined by respondent under section 6662(a). We hold it is. 

Unless otherwise stated, section references are to the

Internal Revenue Code in effect for the years in issue. Rule

references are to the Tax Court Rules of Practice and Procedure.

Background

All facts have been stipulated and are so found. The

stipulations and attached exhibits are incorporated herein by

this reference. Petitioner's principal place of business was in

Troy, Michigan, when it petitioned the Court. During all

relevant times, F. Douglas Forier (F. Forier) owned 100 percent

of petitioner's outstanding stock, and F. Forier, Margaret Forier
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1The Foriers were cash basis, calendar year taxpayers. 

Petitioner paid the $200,000 in wages accrued in 1990 in two

installments on June 30, 1992, and December 19, 1992, and the

Foriers included it in their income for 1992. Petitioner paid

the $18,250 accrued in 1991 on August 2, 1991, and the Foriers

included it in their income for 1991.

(M. Forier) and Richard Forier (R. Forier) were petitioner's

officers and directors. F. Forier and M. Forier (the Foriers)

had signature authority over petitioner's bank accounts. 

For the subject years, petitioner filed Federal income tax

returns purporting to utilize an accrual method of accounting. 

On these returns, petitioner accrued and deducted unpaid expenses

of $286,665 and $199,994 for the respective subject years. The

$286,665 includes $200,000 in unpaid accrued wages to the

Foriers, and the $199,994 includes $18,250 in unpaid accrued

wages to the Foriers. The Foriers did not include these wages

in their income until petitioner actually paid them.1 Petitioner

had sufficient cash on hand to pay the accrued wages as of the

close of each taxable year. 

Respondent determined and petitioner now agrees that

petitioner should have reported its income under the cash method. 

Respondent disallowed the deduction of all unpaid accrued

expenses claimed on petitioner's returns. Petitioner concedes

the adjustments in each year except with respect to the unpaid

accrued wages to the Foriers. Petitioner contends that the wages
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were constructively received by the Foriers when accrued, thus

constructively paid and deductible.

Discussion

Petitioner has dredged up the deeply buried, oft-rejected

"constructive payment" doctrine. Respondent contends petitioner,

a cash method taxpayer, may deduct the wages at issue only when

actually paid. Petitioner contends that the Foriers could have

drawn the accrued wages when they wished and that they were in

constructive receipt of the wages. Therefore, the argument goes,

the doctrine of constructive payment should be applied under

these facts, and petitioner should be allowed to deduct the 

unpaid accrued wages. We disagree.

Respondent's determination is presumed correct, and

petitioner bears the burden of proof. See Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933). Petitioner concedes it is a cash

basis taxpayer. As such, it may only deduct expenditures in the

year paid. See secs. 446, 461; secs. 1.446-1(c)(1), 1.461-

1(a)(1), Income Tax Regs. While a cash basis taxpayer must

include in income amounts actually or constructively received

during the year, see sec. 451 and sec. 1.451-1, Income Tax Regs.,

there is no such provision for constructive payment. It is now

horn-book law that "constructive payment" is not a necessary

corollary of "constructive receipt," and what may be income to 

one may not be a deductible payment by the other. See Citizens
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Fed. Sav. & Loan v. Commissioner, 30 T.C. 285 (1958); William J.

Lemp Brewing Co. v. Commissioner, 18 T.C. 586 (1952); Vander

Poel, Francis & Co. v. Commissioner, 8 T.C. 407 (1947); Sandoval

v. Commissioner, T.C. Memo. 1979-430; 2 Mertens, Law of Federal

Income Taxation, sec. 10:33.50, at 80 (1991 rev.).

Petitioner misplaces reliance upon such cases as Fetzer

Refrigerator Co. v. United States, 437 F.2d 577 (6th Cir. 1971),

and Hyplains Dressed Beef, Inc. v. Commissioner, 56 T.C. 119

(1971), to support its position that constructive receipt is the

appropriate standard. Those cases, which are inapposite,

involved application of the matching principle of section

267(a)(2), which matching principal is: An accrual basis

taxpayer is not entitled to deduct currently any amount if it is

payable to a related person and, because of the payee’s method of

accounting, the item is not currently includable in the payee’s

gross income. See sec. 267(a)(2); Tate & Lyle, Inc. & Subs. v.

Commissioner, 103 T.C. 656, 659-661 (1994), revd. and remanded on

other grounds 87 F.3d 99 (3d Cir. 1996). Section 267 applies

when the mismatching arises because the parties use different

methods of accounting. That is not the case here. Petitioner

and the Foriers are cash basis taxpayers. There is no

mismatching of a deduction and inclusion due to different

accounting methods. Petitioner distorts the language of section

267, arguing that such language would allow a cash basis taxpayer
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2Petitioner's argument is rendered particularly meritless by

the fact that the Foriers apparently did not believe they were in

"constructive receipt" of the wages when accrued by petitioner

since they did not include the wages in income until actually

paid. 

to deduct unpaid expenses if the party to whom the expenses were

paid is in constructive receipt. We find this argument meritless

and hold petitioner may not deduct the unpaid wages.2 We sustain

respondent's determination.

Respondent determined petitioner is liable for the 

accuracy-related penalty under section 6662(a) and (b)(1) for

both years in issue. That section imposes a penalty equal to 20

percent of the portion of an underpayment that is attributable

to, among other things, negligence. Petitioner will avoid this

penalty if the record shows that it was not negligent; i.e., it

made a reasonable attempt to comply with the provisions of the

Internal Revenue Code and was not careless, reckless, or in

intentional disregard of rules or regulations. See sec. 6662(c);

Accardo v. Commissioner, 942 F.2d 444, 452 (7th Cir. 1991), affg.

94 T.C. 96 (1990); Drum v. Commissioner, T.C. Memo. 1994-433,

affd. without published opinion 61 F.3d 910 (9th Cir. 1995). 

Negligence connotes a lack of due care or a failure to do what a

reasonable and prudent person would do under the circumstances. 

See Allen v. Commissioner, 92 T.C. 1 (1989), affd. 925 F.2d 348

(9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947 (1985). 
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3Because we hold petitioner is liable for the negligence

penalty under sec. 6662(a) and (b)(1), we need not address

respondent's alternative position that there was a substantial

understatement or petitioner's argument that the items were

disclosed on the returns.

The accuracy-related penalty of section 6662 is not applicable to

any portion of an underpayment to the extent that the taxpayer

has reasonable cause for that portion and acts in good faith with

respect thereto. See sec. 6664(c)(1). 

The facts in the stipulated record fail to persuade us that 

petitioner was not negligent or that reasonable cause existed for

petitioner's position on the returns. On the contrary,

petitioner conceded the validity of respondent's determination

that its income should be computed on the cash method, and

petitioner conceded a large part of respondent's determination in

each year. There is no evidence petitioner was not negligent

regarding the conceded items. Likewise, there is no evidence

petitioner was not negligent or that reasonable cause exists

regarding its deduction of the unpaid accrued wages. We sustain

respondent's determination.3

To reflect the foregoing,

Decision will be entered 

for respondent.