## Facts

- Jack J. Grynberg and Celeste Grynberg filed joint federal income tax returns for 1974–1979 using the cash method of accounting.
- The Commissioner determined income tax deficiencies for 1974–1979; the parties settled some matters, leaving two issues for decision in consolidated proceedings.
- For 1974 and 1975, petitioners made elections under IRC § 170(b)(1)(D)(iii) affecting limitations on charitable contribution deductions involving capital gain property.
- After the Commissioner made adjustments to unrelated items for 1974 and 1975, petitioners sought to revoke their § 170(b)(1)(D)(iii) elections.
- Jack Grynberg held numerous oil and gas leases containing delay-rental provisions requiring payments to keep leases in force when drilling had not commenced by specified dates.
- During 1974–1979, petitioners prepaid certain delay rentals: in each December they paid delay rentals that would become due in February and March of the following year.
- Petitioners deducted those December prepayments in the year paid; the Commissioner disallowed the timing, asserting the deductions belonged in the year the rentals became due.

## Issues

1. Whether the doctrine of election barred petitioners from revoking § 170(b)(1)(D)(iii) elections made on their timely filed 1974 and 1975 returns.
2. Whether December prepayments of delay rentals due the following February and March were deductible in the year of payment under § 162 and the clear-reflection-of-income standard of § 446(b).

## Decision

- Petitioners were bound by their § 170(b)(1)(D)(iii) elections and could not revoke them after later adjustments made the elections unfavorable.
- The December prepayments of delay rentals due in the following year were not “ordinary and necessary” expenses of the year paid and were not deductible in that earlier year.
- The Commissioner’s determinations on the two litigated issues were sustained.

## Legal Principles

- Under the doctrine of election, when a taxpayer chooses among inconsistent statutory tax treatments on a timely filed return, the taxpayer generally may not later revoke that choice merely because it becomes disadvantageous.
- Deductions for prepaid business expenses by a cash-method taxpayer are evaluated under § 162 together with § 446(b)’s requirement that the accounting method clearly reflect income; the Commissioner may disallow timing that materially distorts income.
- A prepaid item is deductible in the year paid only if all are satisfied: (1) the payment is an actual payment rather than a refundable deposit, (2) the prepayment is supported by a substantial non-tax business reason, and (3) deducting the item in the year of payment does not materially distort income.
- Delay rentals prepaid for obligations arising in a subsequent year are not deductible in the prepayment year when the prepayment lacks a substantial non-tax business reason and accelerates deductions in a way that does not clearly reflect income.

## Conclusion

The Tax Court held that petitioners could not revoke charitable-contribution elections made on their filed returns and that cash-method taxpayers could not deduct December prepayments of next-year delay rentals where the prepayment timing lacked a substantial non-tax business reason and would not clearly reflect income.


Grynberg v. Commissioner, 83 T.C. 255 (1984)