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The term “clearly reflect income” is not statutorily
defined, and generally accepted accounting principles,
consistently applied, usually will “clearly reflect income” for
tax purposes. See, e.g., sec. 1.446-1(a)(2), (c)(1)(ii), Income
Tax Regs. The Commissioner, however, may reject a taxpayer’s
method if it does not clearly reflect income and substitute a
method that, in the opinion of the Commissioner, does clearly
reflect income. Thor Power Tool Co. v. Commissioner, 439 U.S.
522 (1979). It is important to note in this case that respondent
is not making the determination that CCM does not clearly reflect
income, but that CCM under the circumstances reported by
petitioner does not clearly reflect income.
It should be further noted that petitioner’s income for each
of the severed years would, in any event, not be reported until
the last delivery of aircraft for that year, even after
considering respondent's severance determination. Inherent in
CCM is delay or deferral of profit or loss beyond that
permissible under annual accounting methodology. That delay is
permitted because in the setting of some long-term contracts, a
taxpayer is unable to determine whether it has a profit or loss
until the contract is completed. CCM was not provided for by
Congress, but instead was sanctioned by regulation. Ultimately,
in years subsequent to those before the Court, CCM was prohibited
by Congress (for situations such as those under consideration).
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