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taxpayer establishes that a method of accounting clearly reflects
income, the Commissioner may not disturb the taxpayer's choice.
Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C. 367, 371
(1995); RLC Indus. Co. v. Commissioner, 98 T.C. 457, 491 (1992),
affd. 58 F.3d 413 (9th Cir. 1995). Whether a taxpayer’s method
of accounting clearly reflects income is a question of fact, and
the issue must be decided on a case-by-case basis. Ansley-
Sheppard-Burgess Co. v. Commissioner, supra at 371; RLC Indus.
Co. v. Commissioner, supra at 492; Hamilton Indus., Inc. & Sub.
v. Commissioner, supra at 128.
Section 446(a) requires a taxpayer to compute taxable income
under the method of accounting it regularly uses in keeping its
books. Section 446(b), however, provides:
If no method of accounting has been regularly used by the
taxpayer, or if the method used does not clearly reflect
income, the computation of taxable income shall be made
under such method as, in the opinion of the Secretary, does
clearly reflect income.
The Commissioner's authority under section 446(b) reaches not
only overall methods of accounting but also a taxpayer's method
of accounting for specific items of income and expense. Ford
Motor Co. v. Commissioner, 102 T.C. 87, 100 (1994), affd. 71 F.3d
209 (6th Cir. 1995); Prabel v. Commissioner, 91 T.C. 1101, 1112
(1988), affd. 882 F.2d 820 (3d Cir. 1989); sec. 1.446-1(a),
Income Tax Regs.
In regard to inventory accounting, the regulations
establish two distinct tests to which an inventory must conform:
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