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completed contract method. Therefore, petitioners contend that
requiring them to account for the prior year period costs in the
year of contract completion to compute CTI is inconsistent with
the principles of annual accounting.
Under the principles of annual accounting, a transaction
must be accounted for under the taxpayer's method of accounting
on the basis of the facts in the year the transaction occurs.
Security Flour Mills Co. v. Commissioner, 321 U.S. 281 (1944);
Burnet v. Sanford & Brooks Co., 282 U.S. 359 (1931); Landreth v.
Commissioner, 859 F.2d 643 (9th Cir. 1988), affg. in part, revg.
in part, and remanding T.C. Memo. 1985-413. Section 461(a)
requires that a deduction be taken in the taxable year that is
proper under the taxpayer's method of accounting.
The completed contract method requires income and deductions
from long-term contracts to be reported in the year in which the
contracts are completed. Sec. 1.451-3(d)(1), Income Tax Regs.
However, section 1.451-3(d)(5)(iii), Income Tax Regs., provides a
variation or exception to the requirement that deductions be
deferred. A current deduction is allowed, at the taxpayer's
election, for period costs. Texas Instruments Inc. v.
Commissioner, T.C. Memo. 1992-306; sec. 1.451-3(d)(5)(iii),
Income Tax Regs. Period costs include marketing and selling
expenses, distribution expenses, general and administrative
expenses attributable to the performance of services that benefit
the taxpayer's activities as a whole, casualty losses, certain
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