Section of Taxation Publications
  VOL. 56
NO. 2
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

A Strain Between the Contested Tax Liability Accrual Doctrine and the Accumulated Earnings Tax: Metro Leasing and Development Corporation v. Commissioner
Rusty Brewer


In Metro Leasing and Development Corp. v. Commissioner, the Tax Court held that no part of a paid, but contested, income tax deficiency could be used to reduce the taxpayer’s taxable income in arriving at accumulated earnings taxable income. The court rejected the taxpayer’s reliance on the holding of J.H. Rutter Rex Manufacturing Co. v. Commissioner that a contested income tax deficiency that has been paid is deductible when calculating a corporation’s accumulated taxable income under section 535(b)(1). The Tax Court followed its original ruling in the Rutter Rex case. The court held that the Fifth Circuit misinterpreted the language of Regulation section 1.535-2(a)(1) and that the Tax Court’s original Rutter Rex decision was consistent with cases that follow “traditional accrual principles holding that a contested tax liability is not deductible because it has not accrued.”

Part I of this Note discusses the accumulated earnings tax, how it is computed, what deductions apply, and the facts of Metro Leasing. Part II summarizes the Tax Court’s decision and reasoning. Part III argues that the Tax Court incorrectly decided this case because it failed to follow the reasoning of the Fifth Circuit in Rutter Rex.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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