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reversed out by respondent was again included in 1993 income. On
brief, respondent contended that the section 481 adjustment was
necessary “to correct the distortion caused by the double
exclusion.” That is, petitioner deducted litigation costs for
1992 and, under respondent’s deficiency notice approach reversing
the reimbursement income, petitioner did not have to account for
the 1993 reimbursement of the previously deducted items.
Section 481(a) provides that where taxable income from any
year is computed under a method of accounting that is different
from the method used for the preceding year, then the computation
of the taxable income for the year of the change shall take into
account those adjustments that are determined to be necessary
solely by reason of the change in order to prevent duplications
and/or omissions. A section 481 change includes a change in the
overall plan or method of accounting for income or deductions. A
section 481 change also includes a change in the treatment of any
material item used in the overall plan. See secs. 1.481-1(a)(1),
1.446-1(e)(2)(ii)(a), Income Tax Regs. A material item is
defined as “any item which involves the proper time for the
inclusion of the item in income or the taking of a deduction.”
Sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs. A “change in method
of accounting does not include adjustment of any item of income
or deduction which does not involve the proper time for the
inclusion of the item of income or the taking of a deduction.”
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