Opinion ID: 522954
Heading Depth: 2
Heading Rank: 2

Heading: Contested Liability

Text: 26 Although the Secretary's waiver was ineffective, a second ground exists for disallowing the taxpayers' 1978 interest deductions. It has long been established that an accrual basis taxpayer may not deduct an expense for the year in which the taxpayer has contested his or her liability for that expense. Dixie Pine Prods., 320 U.S. at 519, 64 S.Ct. at 365; Security Flour Mills Co. v. Commissioner, 321 U.S. 281, 284, 64 S.Ct. 596, 597-98, 88 L.Ed. 725 (1944). The Treasury Regulations set forth the standard for determining whether an obligation has been contested: 27 A contest arises when there is a bona fide dispute as to the proper evaluation of the law or the facts necessary to determine the existence or correctness of the amount of an asserted liability   . An affirmative act denying the validity or accuracy, or both, of an asserted liability to the person who is asserting such liability,    is sufficient to commence a contest. 28 Treas.Reg. Sec. 1.461-2(b)(2) (1988). 29 CRLC's answer to the amended complaint in the 1980 foreclosure action admitted that CRLC had not paid the amounts in default but denied that the amounts were due and owing because CRLC was relieved of its obligation to make such payments by virtue of the failure of [NCDC] to perform in accordance with its agreements. The Tax Court interpreted this language as an affirmative defense that CRLC was relieved of its obligation to pay the 1978 interest. The court held that the pleadings and other memoranda filed by CRLC in the foreclosure litigation constituted a contest of its 1978 interest and fees obligations, and therefore the taxpayers were not entitled to a deduction that year. 30 The taxpayers argue that the contest rule is not applicable here because CRLC did not dispute its 1978 interest obligation in the foreclosure proceedings, but rather, challenged only the acceleration of the principal amount and the foreclosure remedy. The taxpayers assert that the court's analysis of the foreclosure pleadings was erroneous as a matter of law because the pleadings were read out of context and the court ignored uncontroverted testimony which confirmed that the pleadings challenged only the acceleration of the principal. 31 We agree that CRLC did not explicitly contest its 1978 interest obligation. The Commissioner may disallow a deduction on the basis of a contest if it is established that a liability has been asserted and contested. Treas.Reg. Sec. 1.461-2(b)(2) (1988). In the government's amended complaint in the foreclosure litigation, the 1978 interest obligation was not alleged and thus CRLC's assertion that it was relieved of its obligation to pay the principal and interest due cannot be considered an explicit contest of the 1978 interest. However, our analysis does not end there. The pleadings as a whole, coupled with the other relevant documents and testimony, establish CRLC's position in the foreclosure litigation. The gist of CRLC's argument was that, although CRLC had not paid the principal and interest due under the Agreement, such amounts were not due and owing at the time of the litigation because of the government's failure to file an environmental impact statement, and other defaults on the Agreement. CRLC claimed that it was relieved of its obligations to make any payments until the government performed its part of the Agreement. The logical extrapolation of this argument is that, if the government never performed its requisite obligations, then CRLC would never have to pay the principal and interest due. One cannot contest the principal of a debt without contesting any and all possible obligations that go along with that principal. Looking at the foreclosure litigation as a whole, we conclude that CRLC's position contested the underlying debt and, therefore, implicitly contested all possible consequences arising from that debt. 32 In addition, we note that CRLC's position in the foreclosure litigation rendered the 1978 interest obligation contingent because, at the close of 1978, that litigation was unresolved and the government had not yet cured its alleged breaches of the Agreement. Consequently, the obligation was not fixed and definite because the issue as to when, if ever, CRLC would owe the interest was unresolved.