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gross income from sales: “The cost of goods purchased for
resale, with proper adjustment for opening and closing
inventories, is deducted from gross sales in computing gross
income.”
Section 446(a) provides the general rule for methods of
accounting: “Taxable income shall be computed under the method
of accounting on the basis of which the taxpayer regularly
computes his income in keeping his books.” In pertinent part,
section 446(b) provides: “[I]f the method used does not clearly
reflect income, the computation of taxable income shall be made
under such method as, in the opinion of the Secretary, does
clearly reflect income.”
Section 471(a) is specific with respect to the use of
inventories:
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.
The Secretary has exercised the discretion conferred upon him by
Congress in section 471 by requiring, pursuant to regulations,
that, “[i]n order to reflect taxable income correctly,
inventories at the beginning and end of each taxable year are
necessary in every case in which the production, purchase, or
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