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Respondent determined (and reflected in her notice of
deficiency) that petitioner’s inventory had increased from an
opening inventory of zero on January 1, 1988, to a closing
inventory of $61,305 on December 31, 1988. Thus, respondent
determined that petitioner’s 1988 gross income should be
increased by $61,305 to reflect this adjustment. See Hitachi
Sales Corp. of America v. Commissioner, T.C. Memo. 1995-84.
Respondent did not determine that any of this increase qualified
as an adjustment under section 481(a). Respondent has since
conceded that petitioner’s opening inventory was $10,000 on
January 1, 1988. Respondent further concedes that petitioner’s
gross income for 1988 should be increased by only $51,305.
Petitioner does not dispute the fact that he must recognize
$51,305 of income in 1988 on account of this adjustment. The
parties disagree on whether the $51,305 adjustment is subject to
section 481(a). If it is, petitioner claims that he can account
for this adjustment under the rules of section 481(b). Section
481(b) applies when: (1) A taxpayer changes a method of
accounting, (2) the taxpayer’s income in the year of the change
is increased by more than $3,000 solely by reason of the change
in order to prevent amounts from being duplicated or omitted, and
(3) the taxpayer used the former method of accounting during the
2 taxable years immediately preceding the year of the change.
Sec. 481(b)(1).
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