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substantially and inappropriately defer recovery of basis," the
taxpayer may request an alternate method, but the Commissioner is
not granted explicit authority by the temporary regulations to
require the use of an alternate method in that situation.
Sec. 15a.453-1(c)(7)(ii), Temporary Income Tax Regs., 46 Fed.
Reg. 10716. The Commissioner may prescribe an alternate method
if she determines that the taxpayer's method of accounting with
respect to the sale does not "clearly reflect income". Sec.
446(b). In general, the Commissioner has broad discretion to
determine whether an accounting method clearly reflects income.
See Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532-533
(1979); Commissioner v. Hansen, 360 U.S. 446, 467 (1959); Ferrill
v. Commissioner, 684 F.2d. 261, 264 (3d Cir. 1982), affg. T.C.
Memo. 1979-501; Hudson v. Commissioner, T.C. Memo. 1996-106. A
taxpayer's method of accounting does not clearly reflect income
when it does not represent "economic reality". See Prabel v.
Commissioner, 882 F.2d 820, 826-827 (3d Cir. 1989), affg. 91 T.C.
1101 (1988). In this case, the Commissioner has not exercised
her discretion by raising the clear reflection of income issue in
her pleadings or in her brief.
2. Economic Substance
a. Introduction
In his opening statement, petitioner's counsel aptly
characterized the role of economic substance in this case:
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