39
We also pointed out in Electric & Neon, Inc. v. Commissioner,
supra at 1333:
while consistency is highly desirable when combined
with some acceptable method of accounting, it is not a
substitute for correctness; the respondent is justified
in requiring a change in a taxpayer's method of
accounting which, although consistently used over a
period of years, is erroneous, and does not clearly
reflect income.
Accordingly, we find that the banks' current deduction of
the costs associated with the origination of the loans did not
clearly reflect their income and, therefore, was not a proper
method of accounting.26 See also Commissioner v. Idaho Power
Co., 418 U.S. at 14 ("capitalization prevents the distortion of
income that would otherwise occur if depreciation properly
allocable to asset acquisition were deducted from gross income
currently realized."). It is apparent that the banks' current
deduction of the costs at issue improperly accelerated the tax
benefits derived from those costs and did not properly match the
costs with the interest income produced by the loans. We find
that capitalization of these expenses, subject to recovery by
means of amortization over the life of the loans, does clearly
reflect the banks' income and that respondent was within his
broad authority to require this change.
Legislative Necessity
26We note that petitioner did not offer any evidence to show
how the current deduction of the costs at issue clearly reflects
the banks' income.
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