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The term “clearly reflect income” is undefined in the Code.
In most cases, generally accepted accounting principles,
consistently applied, will pass muster for tax purposes. See,
e.g., sec. 1.446-1(a)(2), (c)(1)(ii), Income Tax Regs. The
Supreme Court has made clear, however, that GAAP does not enjoy a
presumption of accuracy that must be rebutted by the
Commissioner. Thor Power Tool Co. v. Commissioner, supra at 540.
The Commissioner’s supervisory power under section 446(b),
permitting the rejection of a taxpayer’s method if it “does not
clearly reflect income”, and its substitution with a method that,
“in the opinion of the * * * [Commissioner], does clearly reflect
income”, was described by the Supreme Court in another case as
leaving “[m]uch latitude for discretion”, which “should not be
interfered with [by the courts] unless clearly unlawful.” Lucas
v. American Code Co., 280 U.S. 445, 449 (1930) (quoted with
approval in Thor Power Tool Co. v. Commissioner, supra at 532).
B. Standard of Review
When the Commissioner determines that a taxpayer's method of
accounting does not clearly reflect income, the taxpayer has a
heavy burden to show an abuse of discretion. E.g., Asphalt
Prods. Co. v. Commissioner, 796 F.2d 843, 848 (6th Cir. 1986),
affg. in part and revg. in part Akers v. Commissioner, T.C. Memo.
1984-208, revd. per curiam on another issue 482 U.S. 117 (1987).
The Court of Appeals for the Sixth Circuit has stated:
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