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in cost of goods sold (COGS), and AEI subtracted COGS from its
gross receipts to determine its gross income.
OPINION
Petitioners first argue that respondent did not make a
determination that the cash method did not clearly reflect AEI's
income. Petitioners contend that section 446 requires the
Commissioner to make an express finding that the method of
accounting used by the taxpayer does not clearly reflect income.
Respondent counters that a determination was made that the cash
method did not clearly reflect AEI's income. Pursuant to section
446,6 the Commissioner has broad powers to determine whether an
6 Sec. 446 provides in pertinent part:
(a) GENERAL RULE.--Taxable income shall be computed
under the method of accounting on the basis of which the
taxpayer regularly computes his income in keeping his books.
(b) EXCEPTIONS.--If no method of accounting has been
regularly used by the taxpayer, or if the method used 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.
(c) PERMISSIBLE METHODS.--Subject to the provisions of
subsections (a) and (b), a taxpayer may compute taxable
income under any of the following methods of accounting--
(1) the cash receipts and disbursements method;
(2) an accrual method;
(3) any other method permitted by this chapter; or
(4) any combination of the foregoing methods
permitted under regulations prescribed by the
(continued...)
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Last modified: May 25, 2011