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income shall be made under such method as, in the opinion of the
Secretary, does clearly reflect income."
In general, a method of accounting clearly reflects income
when it accurately reports taxable income under a recognized
method of accounting. Wilkinson-Beane, Inc. v. Commissioner,
420 F.2d 352, 354 (1st Cir. 1970), affg. T.C. Memo. 1969-70; RLC
Indus. Co. v. Commissioner, 98 T.C. 457, 490 (1992), affd. 58
F.3d 413 (9th Cir. 1995); Rotolo v. Commissioner, 88 T.C. 1500,
1513 (1987). Both the cash method and the accrual method are
permissible methods of accounting. Sec. 446(c)(1) and (2).
Additionally, section 471(a) provides:
SEC. 471(a). General Rule.-- Whenever in the
opinion of the Secretary the use of inventories is
necessary in order clearly to determine the income of
any taxpayer, inventories shall be taken by such
taxpayer on such basis as the Secretary may prescribe
as conforming as nearly as may be to the best
accounting practice in the trade or business and as
most clearly reflecting the income.
By regulation, the Secretary has determined that
inventories are necessary if the production, purchase, or sale
of merchandise is an income-producing factor. Sec. 1.471-1,
Income Tax Regs. The regulations provide that, unless otherwise
authorized by the Commissioner, a taxpayer who is required to
account for inventories must use the accrual method of
accounting with regard to purchases and sales. Sec. 1.446-
1(c)(2)(i), Income Tax Regs.
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Last modified: May 25, 2011