1954 Internal Revenue Code Two Years Later
BY THOMAS J. GRAVES PARTNER, WASHINGTON OFFICE
Presented at the Eleventh Annual Conference of the Tax Executives Institute, Los Angeles--September 1956
The two years that have passed since the enactment of the Intern-al Revenue Code of 1954 have provided taxpayers with an opportunity to become familiar with its general provisions. This should permit us to dispense with a detailed explanation of the various sections and to concentrate
now on a review of some of the significant problems that have developed, as well as on the possible solutions to those problems.
PREPAID INCOME AND DEFERRED EXPENSES
Nothing in the new Code created more excitement than the ill-fated sections that would have permitted the deferral of prepaid income and the deduction of provisions for estimated expenses. They entered the income-tax scene under the best of auspices. In his 1954-budget message, the President recommended that tax accounting should be brought more closely in line with accepted business accounting. When this recommendation was adopted by Congress in the enactment of the new Code, the resulting sections 452 and 462 were acclaimed as a significant
step in the struggle to bring some rational rules to tax accounting.
Despite the almost unanimous approval of these sections, when it became apparent that they might result in a substantial loss of revenue, they were promptly repealed. Even while recommending repeal, however,
the Senate Finance Committee was careful to explain that it was not abandoning their basic principles and that it expected to make a future
report of legislation dealing with the problem.
There seems to be little disagreement as to whether there is actually
a problem. Both the 1939 Code and the 1954 Code provide that a taxpayer's method of accounting shall clearly reflect his income. While this seems to be a simple concept, it has been largely ignored by the courts in the development and application of the claim of right doctrine to prepaid income and of the principle that deductible expenses must be represented by fixed and determinable liabilities. The result has been