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purchase and sale of merchandise.3 Knight-Ridder Newspapers,
Inc. v. United States, supra at 789; Sec. 1.446-1(c)(2)(i),
Income Tax Regs.
We hold that respondent did not abuse her discretion in
changing petitioner's method of accounting to an accrual method.
2. Section 481 Adjustment
A taxpayer who changes his or her method of accounting,
whether voluntarily or involuntarily, must compute an adjustment
under section 481(a). Section 481(a) provides that a taxpayer's
taxable income for the year of an accounting method change is
computed by taking into account those adjustments that are
necessary (solely due to the change), to prevent amounts from
being duplicated or omitted. See also sec. 1.481-1(a)(1), Income
Tax Regs. An item of income or deduction will be duplicated if
the taxpayer, in a prior year: (1) Recognized income that would
be recognized again under the new method of accounting or
(2) deducted an item that would be deducted again under the new
method of accounting. An item of income or deduction would be
omitted if the taxpayer, in a prior year: (1) did not recognize
income that will not be recognized under the new method of
accounting or (2) Did not deduct an item that will not be
deducted under the new method of accounting.
3 Generally, where an individual has been required to
maintain inventories, he or she must use the accrual method of
accounting with regard to purchases and sales. See sec.
1.446-1(c)(2)(i), Income Tax Regs.
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