- 4 - 1987 1988 Gross receipts $321,596 $371,994 Cost of goods sold $257,346 $353,118 Gross profit percentage 20% 5% Respondent determined that petitioner had no ending inventory on December 31, 1987, and, consequently, no beginning inventory on January 1, 1988. The parties have since stipulated, however, that petitioner had $10,000 of inventory on January 1, 1988. Respondent also determined that petitioner had $61,305 of inventory on December 31, 1988. Discussion 1. Change in Method of Accounting We must first decide whether respondent abused her discretion by changing petitioner from the cash method to an accrual method in order to reflect his inventory, beginning with the 1988 tax year. We refer to sections 446 and 471 to make our decision. Taxable income generally is computed based on the method of accounting on which the taxpayer regularly keeps his or her books. Sec. 446(a). The term "method of accounting" includes the adjustment of any "material item" involving the proper timing of income and expense. Sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs. Inventories are a material item.Page: Previous 1 2 3 4 5 6 7 8 9 10 Next
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