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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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