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determining whether a method of accounting clearly reflects
income. Public Service Co. v. Commissioner, supra at 455-457;
Fox Chevrolet, Inc. v. Commissioner, 76 T.C. 708, 728 (1981);
Magnon v. Commissioner, 73 T.C. 980, 1004-1006 (1980); Epic
Metals Corp. & Subs. v. Commissioner, T.C. Memo. 1984-322, affd.
without published opinion 770 F.2d 1069 (3d Cir. 1985).
Consequently, any distortion of income must be examined in light
of the business practice or business activities that give rise to
the transaction which the Commissioner has determined must be
accorded a different accounting treatment. Van Raden v.
Commissioner, supra.
In the instant case, the use of a hybrid method of
accounting was specifically designed for petitioners’ hospitals
during the audit of petitioners' returns for the taxable years
ended 1972 and 1973 to capture, for accrual purposes, income and
expenses relating to the purchases and sales of many medical
supplies while permitting income and related expenses from all
other sources to be computed on the cash method. As stated
above, section 1.446-1(c)(iv)(a), Income Tax Regs., permits a
taxpayer using the accrual method with respect to purchases and
sales to use the cash method in computing all other items of
income and expense, provided that the taxpayer's income is
clearly reflected by the use of such method. Accordingly, the
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