Addison Distribution, Inc. - Page 7

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            the cash method of accounting violates section 1.446-1(c)(2)(i),                             
            Income Tax Regs.  We conclude that respondent's determination                                
            that AEI is required to use inventories is a determination that                              
            AEI's use of the cash method of accounting does not clearly                                  
            reflect income.                                                                              
                  Petitioners next assert that AEI is not required to account                            
            for inventories because it does not take title to the electronic                             
            materials.  Respondent claims that AEI has title to the                                      
            electronic materials, they are merchandise which AEI held for                                
            sale, and they are an income-producing factor.  Therefore,                                   
            respondent claims that the regulations under sections 446 and 471                            
            require AEI to use inventories and the accrual method of                                     
                  The issue for decision is whether it is an abuse of                                    
            respondent's discretion to require AEI to change from the cash                               
            method, which AEI uses for income tax reporting purposes, to the                             
            accrual method.  Subsumed in this issue is the question of                                   
            whether AEI should be required to account for inventories for tax                            
            purposes.  To resolve these issues, we consider sections 446 and                             
            471 and the regulations thereunder.                                                          
                  Courts do not interfere with the Commissioner's                                        
            determination under section 446 unless it is clearly unlawful.                               
            Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532 (1979);                               
            Cole v. Commissioner, 586 F.2d 747, 749 (9th Cir. 1978), affg. 64                            

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