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Petitioners argue in the alternative that respondent was not
substantially justified with regard to other issues that we did
not find necessary to address in Mid-Del I. On brief, in Mid-Del
I, petitioners argued that even if the drugs were merchandise
petitioners could continue to use the cash method. We need not
address the substantive issue involved in this argument but only
whether the position taken by respondent at trial in response to
it was substantially justified.
Respondent’s position at trial was that section 1.471-1,
Income Tax Regs., mandates that if petitioners maintain
inventories, then petitioners may not use the cash method unless
petitioners demonstrate that the cash method produces a
substantially identical result to that produced by the accrual
method. In support of this argument, respondent relied on
Asphalt Prods. Co. v. Commissioner, 796 F.2d 843, 848 (6th Cir.
1986), affg. in part and revg. in part Akers v. Commissioner,
T.C. Memo. 1984-208, revd. in part on other grounds 482 U.S. 117
(1987); Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C. at
5(...continued)
See sec. 7430(c)(4)(B)(ii); sec. 301.7430-5, Proced. & Admin.
Regs. Furthermore, the Commissioner is not estopped from
attempting to change a method of accounting approved in earlier
years if, in later years, the Commissioner concludes that method
does not clearly reflect income. See Thomas v. Commissioner, 92
T.C. 206, 225-226 (1989); Ezo Prods. Co. v. Commissioner, 37 T.C.
385, 391 (1961).
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