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of such balances grew to $1,049,610. Gross sales during the 1996
taxable year were $40,045,119.4
Money received by petitioner which gave rise to a customer
credit balance was deposited to petitioner’s general
non-interest-bearing bank account. The funds in this bank
account were available to and used by petitioner for regular
operating needs. Although petitioner did not maintain a separate
account for funds attributable to the customer credit balances,
such amounts were reflected as a liability on petitioner’s
general ledger for financial accounting purposes.
Petitioner’s Method of Accounting and Respondent’s Determination
In the course of an audit of petitioner’s 1989 taxable year,
respondent determined that petitioner was required to include in
income the amount of customer credit balances that had been
outstanding for 2 years or more. During the years at issue,
petitioner continued this practice by including in income for
financial and tax accounting purposes the amounts represented by
customer credit balances which had aged for 2 years.5 By way of
4 The record does not reflect what portion of the credit
balances were attributable to customer returns as opposed to
customer overpayments.
5 Petitioner nonetheless continued to consider the amounts
of the customer credit balances that were brought into income as
(continued...)
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