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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510 141 UNITED STATES TAX COURT REPORTS (507)

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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(507) SURIEL v. COMMISSIONER 511

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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512 141 UNITED STATES TAX COURT REPORTS (507)

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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(507) SURIEL v. COMMISSIONER 513

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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(507) SURIEL v. COMMISSIONER 515

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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516 141 UNITED STATES TAX COURT REPORTS (507)

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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(507) SURIEL v. COMMISSIONER 517

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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520 141 UNITED STATES TAX COURT REPORTS (507)

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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522 141 UNITED STATES TAX COURT REPORTS (507)

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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