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The complaint alleges that the Bobrow accountants were negligent
and in breach of contract when they advised Mary Catherine to
submit Federal corporate income tax returns claiming losses
resulting from the Ridge and Minnechaug writedowns. The
complaint further alleges that the Bobrow accountants knew that
Mary Catherine was an S corporation and that Mary Catherine’s
losses would flow through to petitioner and “as such, that all
additional taxes, interest, and other penalties [determined
against Mary Catherine] could be assessed against the plaintiff
Gary L. Pierce as the sole shareholder of the plaintiff
corporation.” Finally, the complaint alleges that the Bobrow
accountants were negligent and in breach of contract when they
failed to advise Mrs. Pierce of her liability arising from her
having filed joint returns with petitioner.
The suit against Bobrow has been stayed pending the outcome
of the case at hand.
OPINION
Issue 1. The Writedowns
The first issue for decision is whether Mary Catherine
improperly used LCM, an inventory method of accounting, to
compute its taxable income for the years 1989 and 1990.
Normally, a taxpayer computes taxable income using the same
method of accounting that he uses to compute income in keeping
books. Sec. 446(a). However, the taxpayer may use “(1) the cash
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