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adjustment under section 481(a) should be made to avoid a
duplication of the deduction.4
2. Section 481(a) Adjustment
Section 481 mandates the imposition of an “adjustment”
determined “to be necessary solely by reason of the change [in
accounting method] in order to prevent amounts from being
duplicated or omitted”. Sec. 481(a)(2). The required adjustment
is made in the “year of the change”. Sec. 1.481-1(a)(1), Income
Tax Regs. “The ‘year of the change’ is the taxable year for
which the taxable income of the taxpayer is computed under a
method of accounting different from that used for the preceding
taxable year.” Id. Here, the year of the purported change is
1996. Without a section 481(a) adjustment of a like amount, Color
Arts would receive a duplicate deduction of $271,671.04.
Petitioner argues that there was no change made in Color
Arts’s method of accounting, and therefore section 481 has no
application.
3. Change of Accounting Method
Generally, taxable income must be computed under the method
of accounting by which the taxpayer regularly computes his income
4Respondent contends that if Color Arts is entitled to a
deduction of $271,671.04 on its 1996 return for accrued vacation
pay, without the imposition of a sec. 481 adjustment in the same
amount, Color Arts will receive a double deduction. As stated
above, Color Arts already deducted $271,671.04 as “accrued”
vacation pay on its 1995 return.
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Last modified: May 25, 2011