The Kroger Company and Subsidiaries - Page 20

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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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Last modified: May 25, 2011