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be determined with reasonable accuracy, and economic
performance has occurred with respect to the liability.
* * *
The term “liability”, as used in section 1.446-1(c)(1)(ii)(A),
Income Tax Regs., is defined in section 1.446-1(c)(1)(ii)(B),
Income Tax Regs., to include “a cost taken into account in
computing cost of goods sold”.
Notwithstanding the latitude generally enjoyed by a taxpayer
in selecting a method of accounting, where inventories are
employed, accrual accounting is the general rule to account for
purchases and sales:
Where inventories are employed, purchases and sales
must be computed on the accrual method (unless another
method is authorized by the Commissioner) in order to
avoid the distortion of income. Sec. 1.446-1(c)(2),
Income Tax Regs.; Stoller v. United States, 162 Ct. Cl.
839, 845, 320 F.2d 340, 343 (1963).
Molsen v. Commissioner, 85 T.C. 485, 499 (1985).
In any event, a taxpayer’s right to adopt a method of
accounting is subject to the requirement that the method must
clearly reflect income. Section 446(b) states that, if the
method adopted “does not clearly reflect income, the computation
of taxable income shall be made under such method as, in the
opinion of the Secretary, does clearly reflect income.” See also
sec. 1.446-1(c)(1)(ii)(C), Income Tax Regs.
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,
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