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of accounting, particularly the LCM method, to real property.
Inventory methods generally require the taxpayer to arrive at an
annual ending inventory value, which means that an inventory of
land would have to be valued frequently. Given the expense and
imprecision of land appraisals, inventory methods of accounting
would be unwieldy for real property. Also, unless each piece of
property is revalued every year, there will always be the
potential for the taxpayer to exercise adverse selection in
reappraising parcels of loss property and to write them down only
when he needs a loss to offset taxable income.
Mary Catherine’s use of an inventory method of accounting,
including the LCM method of valuing ending inventory, is
improper. Petitioner did not present expert opinion testimony
that current financial accounting standards allow real property
to be inventoried. But as the Court of Appeals for the Ninth
Circuit explained in Homes by Ayres v. Commissioner, supra, such
expert opinion would not carry the day because tax and business
accounting can diverge and the Commissioner has discretion in
this area: “The Commissioner has broad discretion over
accounting techniques and, as a matter of law, real estate cannot
be inventoried until * * * [the Commissioner] changes his
position or Congress changes the law.” Homes by Ayres v.
Commissioner, 795 F.2d at 836. Moreover, as the Court of Appeals
observed, the conclusion that real property is not “merchandise”
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