Richard D. Hudson and Betty L. Hudson - Page 9

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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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