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Eagle's method of accounting for customer deposits clearly
reflects income, was consistently used over time, conforms to its
method of keeping internal books and records and preparing
financial reports, complies with Generally Accepted Accounting
Principles (GAAP), and qualifies for deferral under section
1.451-5, Income Tax Regs.
2. Background
A taxpayer’s right to use a method of accounting is subject
to the requirement that the method clearly reflect income. Sec.
446(b). The Commissioner has broad discretion to determine
whether a taxpayer's method of accounting clearly reflects
income. RLC Indus. Co. v. Commissioner, 98 T.C. 457, 491 (1992),
affd. 58 F.3d 413 (9th Cir. 1995).
Generally, a taxpayer has the burden of overcoming a
determination by the Commissioner that the taxpayer's method of
accounting does not clearly reflect income. Thor Power Tool Co.
v. Commissioner, 439 U.S. 522, 532 (1979); Ferrill v.
Commissioner, 684 F.2d 261, 263 (3d Cir. 1982), affg. per curiam
T.C. Memo. 1979-501. However, as discussed in paragraphs II-B
and II-C, below, respondent prevails on the customer deposits
issue regardless of which party bears the burden of proof.
We first consider whether petitioner may defer reporting
customer deposits if Eagle is not eligible to defer reporting
deposits under section 1.451-5, Income Tax Regs. We will then
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