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regulations under section 446 specifically authorize the use of
the hybrid method.25 See also sec. 446(c)(4).
In RLC Indus. Co. v. Commissioner, 98 T.C. at 502-503, the
taxpayer, a large timber user, combined timber in Oregon and
California into a single block for purposes of computing its
depletion under sections 611 and 631. Even though the taxpayer's
method was specifically authorized under the regulations, the
Commissioner argued that the taxpayer's approach did not clearly
reflect income. We observed:
In this case, petitioner complied with the
regulations and was in conformity with accounting
principles, industry practice, and other standards
considered in this area. Respondent argues that the
method that she determined would more clearly reflect
income. Respondent's focus is upon the disparity
between the method she determined and the one used by
petitioner. That focus, in the setting of this case,
is an insufficient reason for the imposition of a
differing method determined by respondent. The best
method is not necessarily the one which produces the
most tax in a particular year. If, as here, a
taxpayer's method is consistently applied and clearly
25
In Sullivan v. Commissioner, T.C. Memo. 1963-264, the
taxpayer, a subcontractor to general contractors on building
construction jobs who also did some manufacturing of component
parts, changed his method of accounting from the cash method to a
modified accrual method whereby he accounted for purchases and
sales on the accrual method and all other items of income and
expense on the cash method. We noted that the Commissioner's
regulations explicitly sanction such a hybrid method. Under such
circumstances, we held that the taxpayer could not accrue as a
legal and auditing expense an auditing fee incurred during the
tax year for reconstructing his accounting records and paid
during a later tax year, but that the taxpayer would have to
account for and deduct such auditing expense on the cash method;
i.e., the method he used for all his expenses other than
purchases.
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