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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
accounting.
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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