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Petitioners improperly reported income on the cash method and
related expenses on an accrual method. See sec. 1.446-
1(c)(1)(iv), Income Tax Regs. A taxpayer’s method of accounting
that is plainly contrary to the regulations does not clearly
reflect income. See Thor Power Tool Co. v. Commissioner, 439
U.S. 522, 523, 533 (1979).
Petitioners rely on G.C.M. 37,316 (Nov. 11, 1977) and G.C.M.
39,328 (June 8, 1984) for the proposition that use of an
accounting method for 2 years is sufficient to establish a
taxpayer’s right to use that method. Petitioners’ reliance is
misplaced. Neither G.C.M. permits a taxpayer to use an improper
accounting method.
Petitioners must deduct business expenses in the taxable
year in which the expenses are paid. See sec. 461(a); sec.
1.461-1(a)(1), Income Tax Regs. Petitioners paid $63,620 of
repair expenses in 1995; thus, they may not deduct those expenses
in 1994.
Petitioners contend that respondent improperly changed
petitioners’ method of accounting from a hybrid method to the
cash method. We disagree. Respondent may change petitioners’
method of accounting to another method that, in respondent’s
opinion, clearly reflects income if respondent determines that
they used an impermissible accounting method to report income.
See sec. 446(b). As discussed above, petitioners used an
improper hybrid method of accounting in 1994, and respondent’s
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