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to defer yearend income, S. Rept. 99-313, 1986-3 C.B. (Vol. 3),
120-121, Congress passed section 451(f).
Section 451(f)(1) provides:
In the case of a taxpayer the taxable income of which
is computed under an accrual method of accounting, any
income attributable to the sale or furnishing of
utility services to customers shall be included in
gross income not later than the taxable year in which
such services are provided to such customers.
This section effectively requires taxpayers to discontinue using
the cycle meter-reading method of accounting and adopt a method
of accounting that includes taxable income from utility service
provided during the taxable year, including the unbilled period.
Effective for 1987 and years thereafter, petitioner changed
its method of accounting for tax purposes and began accruing
utility fees attributable to nongas margin from the unbilled
period. Petitioner did not, however, make an accrual for utility
fees attributable to gas costs from the unbilled period.
Consistent with this change in method of accounting, petitioner
made a section 481 adjustment, including in taxable income that
portion of utility fees from the unbilled period attributable to
the nongas margin, as of December 31, 1986.
Petitioner’s method of accounting violates the literal
requirements of section 451(f) because it does not accrue utility
fees attributable to gas costs from the unbilled period. In
practice, petitioner calculates taxable income using meter
readings as a proxy for actual utility services provided during
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