Zaninovich v. Commissioner

In 1973 the Zaninoviches (plaintiffs) signed a 20-year lease for their farming business, with each year's rent (for a December 1 to November 30 term) due by December 20. They used the cash method of accounting, recognizing income and expenses when actually paid or received. They deducted the entire first year's rent on their 1973 return. The IRS Commissioner (defendant) determined the payment had to be prorated so that only the portion allocable to December 1973 was deductible that year. The Tax Court agreed, and the Zaninoviches appealed.

Whether a cash-basis taxpayer must capitalize and prorate a lease payment that secures only a one-year rental term, rather than deducting it in full in the year of payment.