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proper taxable year under the method of accounting used in
computing taxable income.” Hence, petitioner here, as an accrual
basis taxpayer deducting expenses under the cash or payment
method, is indisputably in contravention of these general rules.
However, income tax regulations implicitly and courts explicitly
recognize that the section 446(a) requirement of conformity
between financial and tax accounting is not absolute. Section
1.446-1(a)(4), Income Tax Regs., implies that deviation may be
permitted by mentioning the need for records to reconcile
differences between books and tax returns. Courts expressly
sanction variations between financial and tax reporting but will
do so only if two criteria are satisfied: (1) Other Code
requirements, such as the deduction and capitalization rules of
sections 162 and 263, must be met, and (2) the method of
accounting must clearly reflect taxable income. See, e.g., Hotel
Kingkade v. Commissioner, 180 F.2d 310, 312-313 (10th Cir. 1950),
affg. 12 T.C. 561 (1949); Coors v. Commissioner, 60 T.C. 368,
392-398 (1973), affd. 519 F.2d 1280 (10th Cir. 1975); Fidelity
Associates, Inc. v. Commissioner, T.C. Memo. 1992-142.
Deduction and Capitalization Rules
On one hand, section 162(a) provides in relevant part:
“There shall be allowed as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business”. Income tax regulations
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