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4. Section 481 Adjustment
Respondent made an additional adjustment to the income of
petitioner DFM Investment Co. for its taxable year ended
March 31, 1990, pursuant to section 481. The adjustment purports
to reflect the aggregate of the unreported income realized from
the sale of VSC's in prior taxable years plus accumulated
investment income, reduced by allowable deductions for refunds,
payments to other repair facilities, Commissions, and an
amortization allowance for Premiums. The controversy concerns
whether section 481 authorizes an adjustment under the
circumstances of this case.
Section 481(a) provides that where taxable income for any
year is computed under a method of accounting that is different
from the method used for the preceding year, then the computation
of taxable income for the year of the change shall take into
account those adjustments that are determined to be necessary
solely by reason of the change in order to prevent amounts from
being duplicated or omitted. A change in method of accounting to
which section 481 applies includes a change in the overall plan
of accounting for gross income or deductions or a change in the
treatment of any material item used in the overall plan. Secs.
1.481-1(a)(1), 1.446-1(e)(2)(ii)(a), Income Tax Regs. A material
item is "any item which involves the proper time for the
inclusion of the item in income or the taking of a deduction."
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