                  T.C. Summary Opinion 2001-110



                     UNITED STATES TAX COURT



        JEFFREY D. AND BONITA L. WOODLEE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10897-98S.                     Filed July 25, 2001.



     Jeffrey D. and Bonita L. Woodlee, pro se.

     Ronald T. Jordan, for respondent.


     CARLUZZO, Special Trial Judge:    This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for 1994.    Rule references are to the Tax

Court Rules of Practice and Procedure.   The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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     Respondent determined a deficiency of $7,615 in petitioners’

1994 Federal income tax.    The issue for decision is whether

petitioners are entitled to a deduction for certain accrued but

unpaid business expenses.

Background

     Some of the facts have been stipulated and are so found.

Petitioners are husband and wife.    They filed a timely joint 1994

Federal income tax return which was prepared by a professional

income tax return preparer.    At the time that the petition was

filed, they resided in Beech Grove, Indiana.    References to

petitioner are to Jeffrey D. Woodlee.

     During 1994, petitioner was the sole proprietor of Specialty

Insulators (Specialty), a business engaged in the installation of

insulation in commercial and residential buildings.    Business

income was deposited into, and business expenses were paid from,

a separate checking account maintained by petitioner for such

purposes.

     Included with petitioners’ 1994 return is a Schedule C,

Profit or Loss From Business, on which the income and deductions

attributable to Specialty are reported as follows:
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            Gross income                    $136,871

            Car and truck expenses            13,847
            Depreciation/sec. 179
              expense deduction                1,031
            Insurance                            719
            Office expense                     5,950
            Rent/lease                           828
            Supplies                         110,775
            Taxes/licenses                     2,500

              Total expenses                 135,650

              Net Profit                       1,221

According to the Schedule C, the above items were reported in

accordance with the cash method of accounting.     The Schedule C

further suggests that petitioner “started or acquired this

business” before 1994.

     Although petitioners claimed a $110,775 deduction for

supplies in 1994, only $81,449 of that amount had been paid as of

the close of that year.    The balance, $29,326, was paid in

installments made during later years.

     In the notice of deficiency, respondent disallowed that

portion of the deduction for supplies that represented unpaid

expenses.    Other adjustments made in the notice of deficiency are

not in dispute.

Discussion

     In general, under the cash method of accounting, income is

recognized in the year of actual or constructive receipt, and

expenses are deductible in the year of actual payment.     Sec.

1.446-1(c)(1)(i), Income Tax Regs.      Respondent, pointing to the
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block checked on the Schedule C indicating that the cash method

of accounting was used to compute the items of income and

deductions reported thereon, argues that petitioners’ 1994

deduction for supplies is limited to the amount paid for such

expenses by the close of that year.     Petitioners, however, claim

that, for 1994, petitioner’s business was on the accrual method

of accounting, under which the deduction for supplies would be

allowed as claimed on their 1994 return.    See sec. 1.446-

1(c)(1)(ii), Income Tax Regs.

     We disagree with petitioners’ claim that petitioner’s

business was on the accrual method of accounting for 1994.    The

claim is inconsistent with the express representation made on the

Schedule C and inconsistent with petitioner’s testimony that his

“checkbook was * * * [his] bookkeeper”.    Furthermore, there is

nothing in the record that suggests that other deductions were

computed on the accrual method of accounting, and it is clear

that the income reported on the Schedule C was not.    “[A]

taxpayer who uses the cash method of accounting in computing

gross income from his trade or business shall use the cash method

in computing expenses of such trade or business.”     Sec. 1.446-

1(c)(1)(iv)(a), Income Tax Regs.

     In accordance with the cash method of accounting,

petitioners are entitled to a deduction for supplies only to the

extent that such expenses were paid during 1994.    Respondent’s
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determination in this regard is therefore sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing and the agreement of the parties

with respect to other items,



                                            Decision will be entered

                                       under Rule 155.
