Addison Distribution, Inc. - Page 5

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            in cost of goods sold (COGS), and AEI subtracted COGS from its                               
            gross receipts to determine its gross income.                                                
                  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                                    

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Last modified: May 25, 2011