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instant case. The regulation provides: “A taxpayer using an
accrual method of accounting with respect to purchases and sales
may use the cash method in computing all other items of income
and expense.” Consequently, taxpayers are specifically allowed
to use the accrual method for purchases and sales of inventory
items and the cash method for the remaining items of income and
expense. The hybrid method formulated during the audit of
petitioners’ 1972-73 returns was designed to capture for accrual
purposes income and expenses relating to the purchases and sales
of inventory while permitting income and related expenses from
all other sources to be computed on the cash method. In three
succeeding audits, respondent’s agents used the hybrid method as
modified or as further modified to incorporate additional income.
Respondent does not argue, nor do we find, that petitioners’
hospitals impermissibly mixed the cash and accrual methods by,
for example, reporting income on the cash method and related
expenses on an accrual method, in contravention of section 1.446-
1(c)(1)(iv), Income Tax Regs. See supra note 25. Petitioners’
hospitals, moreover, utilize a sophisticated cost center
accounting system under which it is quite feasible to accurately
segregate accounts containing merchandise for which an accrual
method is required from accounts which do not contain merchandise
for which the cash method is appropriate. Under such
circumstances, we are persuaded that petitioners’ hospitals
utilized a hybrid method permitted under the regulations.
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