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attempting to change from capitalizing the expenditures in issue
to expensing them, the reverse of the situation described in the
regulations, we were not convinced of the merit of this
distinction and we regarded both situations as examples of
changes involving the timing of a deduction. See Southern Pac.
Transp. Co. v. Commissioner, supra at 683 n.211. We held that
the expenditures that the taxpayer was attempting to
recharacterize from capital to expense fit the definition of
“material item”. Id. at 683.
Although section 446(a) requires a taxpayer to compute his
taxable income in the same manner that he computes income in his
books, this requirement is not absolute. Courts have permitted
variations between financial and tax reporting where other Code
requirements, such as sections 162 and 263, are met, and the
method of accounting clearly reflects income. See USFreightways
Corp. & Subs. v. Commissioner, 113 T.C. 329, 332 (1999). Where
the taxpayer is governed by regulatory agencies, the taxpayer is
not automatically required to follow the regulatory accounting
rules when it reports its activities for tax purposes. See
Commissioner v. Idaho Power Co., 418 U.S. 1, 14-15 (1974); Old
Colony R.R. v. Commissioner, 284 U.S. 552, 562 (1932). However,
while regulatory accounting rules are not binding on a taxpayer,
they are necessarily linked with tax accounting, and the
consistent practice of applying regulatory rules for tax
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