Pelton & Gunther, Professional Corporation - Page 10




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          Sec. 1.446-1(e)(2)(ii)(b), Income Tax Regs.; see also Copy Data,            
          Inc. v. Commissioner, 91 T.C. 26, 30-31 (1988); Schuster’s                  
          Express, Inc. v. Commissioner, 66 T.C. 588, 597 (1976), affd.               
          without published opinion 562 F.2d 39 (2d Cir. 1977).                       
               Here, petitioner claimed deductions for its clients’                   
          litigation costs, which petitioner expected would be reimbursed.            
          The focus of respondent’s adjustment addressed whether petitioner           
          was entitled to deductions for those costs.  Respondent did not             
          change the method of accounting by which petitioner reported a              
          particular item but instead determined that the item was not                
          deductible, ab initio.  The result of petitioner’s deduction in             
          one year and inclusion in another may appear like a timing                  
          question because it could result in increased deductions reducing           
          petitioner’s income in one year and petitioner’s reporting as               
          income any reimbursed deductions in a subsequent year.  The                 
          essence of respondent’s determination, however, was that                    
          petitioner’s payments of litigation costs were loans to its                 
          clients, so the deductions were not allowable and the                       
          reimbursements were not includable in income.                               
               Accordingly, section 481 is not applicable here, and                   
          respondent’s attempt to obviate “the distortion caused by the               
          double exclusion” must fail.  Respondent’s determination and                
          position on brief does not mention tax benefit principles that              
          might require petitioner to report, as income, the reimbursed               





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