20 T.C. 1099">*1099 Respondent determined deficiencies in petitioner's income taxes of $ 7,427.92 and $ 6,045.80 for the taxable years ended January 31, 1949, and January 31, 1950, respectively. The sole issue is whether petitioner is precluded by section 24 (c) of the Internal Revenue Code from deducting rental expenses of $ 19,000 and $ 24,000, respectively, for the years in controversy.

20 T.C. 1099">*1100 FINDINGS OF FACT.

Petitioner is a corporation organized under the laws of the State of Missouri in 1912. Federal income tax returns for the fiscal years in controversy were filed on its behalf on an accrual basis with the collector for the first district of Missouri.

During the fiscal years in controversy, all of petitioner's outstanding shares, with the exception of one qualifying share, were owned by R. Shad Bennett, petitioner's vice president and general manager, and Anna Atkins Bennett, its1953 U.S. Tax Ct. LEXIS 56">*58 treasurer. R. Shad Bennett and Anna Atkins Bennett are husband and wife. They kept their books and filed their income tax returns for the periods in controversy herein on the cash basis.

In 1946 R. Shad Bennett, doing business as an individual proprietorship under the name of Bennett Construction Company, began the construction of a new sanatorium building on the premises occupied by petitioner. The contract was let by Acer Realty Company, a corporation wholly owned by Bennett and his wife. Acer Realty Company owned the property where petitioner is situated during the periods in controversy; it rented this property to the Bennetts, who in turn sublet it to petitioner at an annual rental of $ 24,000.

The cost of constructing the new sanatorium was financed to a large extent by advances made from petitioner to the Bennett Construction Company. At the close of the fiscal years ending January 31, 1949 and 1950, these advances totaled $ 109,461 and $ 107,000, respectively. The construction of the building was not completed during the periods in controversy.

During the year ended January 31, 1949, petitioner paid the sum of $ 5,000 to Bennett toward its rent. The remaining $ 19,0001953 U.S. Tax Ct. LEXIS 56">*59 due as rental to Bennett during that fiscal year was charged on petitioner's books as of January 31, 1949, as a debit to an account entitled "Rent and Administration" and credited against an account entitled "Rent-Accrued-Charged to Bennett Construction Co." The amount was not paid in cash within the fiscal year ended January 31, 1949, or within 2 1/2 months thereafter.

During the fiscal year ended January 31, 1950, petitioner did not pay any rent in cash to Bennett. The entire $ 24,000 due to Bennett was charged on petitioner's books as of January 31, 1950, as a debit to an account entitled "Rent and Administration" and credited against an account entitled "Rent-Accrued-Charged to Bennett Construction Co." That amount was not paid in cash within the fiscal year ended January 31, 1950, or within 2 1/2 months thereafter. These credits to the "Accrued Rent" account were intended to and did offset and 20 T.C. 1099">*1101 reduce the liability of Bennett Construction Company for prior and continuing advances.

In January 1951 petitioner caused its "Accrued Rent" account to be debited in the amount of $ 43,000, and its "Bennett Construction Co." account to be credited in the amount of $ 43,000. 1953 U.S. Tax Ct. LEXIS 56">*60 These entries were stated in the journal to be "contingent" and "held open."

During the periods in controversy, petitioner's bank accounts were not sufficient to cover checks in the sum owed by petitioner to Bennett for rent. During these periods, money on hand was being continuously advanced to Bennett Construction Company for purchase of material and labor. Prior to 1948 it was customary for petitioner to pay its rent by check.

During the fiscal years in controversy and within 2 1/2 months after the close of each, the "Accrued Rent" account and the "Bennett Construction Co." account were kept separately.

In its income tax return for each of the fiscal years ended January 31, 1949 and 1950, petitioner claimed a deduction for rent and administration expense in the amount of $ 24,000. Five thousand dollars of the amount claimed on petitioner's return for the first period in controversy was recognized as paid to R. Shad Bennett in that fiscal year and was allowed as a deduction by respondent in his notice of deficiency. Respondent disallowed the remaining $ 19,000 of the claimed deduction for the fiscal year ended January 31, 1949, and the entire amount of $ 24,000 claimed as a1953 U.S. Tax Ct. LEXIS 56">*61 deduction for the fiscal year ended January 31, 1950, in reliance on the provisions of section 24 (c) of the Internal Revenue Code.

The amount of $ 24,000 which was claimed as a deduction for rent and administrative expense on petitioner's income tax return for the fiscal year ended January 31, 1949, was not reported as income by R. Shad Bennett on his income tax return for the calendar year 1949.

The amount of $ 24,000 which was claimed as a deduction for rent and administrative expense on petitioner's income tax return for the fiscal year ended January 31, 1950, was reported as income on the joint income tax return of R. Shad Bennett and Anna Atkins Bennett for the calendar year 1950.

Bennett's return for the year 1949 contained other omissions. His 1949 return was accompanied by a letter stating that it was a skeleton return that was being filed hurriedly in order to avoid a penalty for not having filed estimated tax returns during the year.

OPINION.

In order to sustain respondent's disallowance of petitioner's rental deduction all three elements of section 24 (c), Internal 20 T.C. 1099">*1102 Revenue Code, must be present. ¹Akron Welding & Spring Co., 10 T.C. 715.1953 U.S. Tax Ct. LEXIS 56">*62 Granting that constructive receipt by the payee would not constitute constructive payment by petitioner under subsection (1), P. G. Lake, Inc., 4 T.C. 1, affd. (C. A. 5) 148 F.2d 898; Granberg Equipment, Inc., 11 T.C. 704, the amount would nevertheless be includible in the payee's income under subsection (2), Michael Flynn Mfg. Co., 3 T.C. 932; cf. Anthony P. Miller, Inc., 7 T.C. 729, revd. (C. A. 3) 164 F.2d 268, and hence noncompliance with the conditions of subsection (2) would render the item deductible.

1953 U.S. Tax Ct. LEXIS 56">*63 And it is not fatal even to the doctrine of constructive receipt that petitioner failed to make the cash immediately available for payment, where, as here, payment could have been accomplished by some means. Ohio Battery & Ignition Co., 5 T.C. 283.

On this approach it matters little whether we refer to the credit on petitioner's books as constructive receipt, see Acer Realty Co., 45 B. T. A. 333, affd. (C. A. 8) 132 F.2d 512, or as actual receipt and payment because the credit had the effect of canceling the payee's debt. Clarke v. United States, (C. A. 3) 189 F.2d 101; Estate of W. P. Graff et al., 9 B. T. A. 1116; see William H. Stayton, Jr., 32 B. T. A. 940, 943; Lorenzo C. Dilks, 15 B. T. A. 1294. It was the one or the other. In either event the requirement of inclusion in the payee's income under subsection (2) would be accomplished and under the doctrine of the Flynn case section 24 (c) would become inapplicable, requiring allowance of the deduction.

1953 U.S. Tax Ct. LEXIS 56">*64 Decision will be entered for the petitioner.