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to the accrual method.2 The Commissioner is granted broad
discretion in determining whether a taxpayer’s use of a method of
accounting clearly reflects income. See sec. 446(b); United
States v. Catto, 384 U.S. 102, 114 & n.22 (1967); Commissioner v.
Hansen, 360 U.S. 446, 468 & n.12 (1959); Lucas v. American Code
Co., 280 U.S. 445, 449 (1930). A prerequisite to the
Commissioner’s exercise of authority to require a taxpayer to
change its present method of accounting is a determination that
the method used by the taxpayer does not clearly reflect income.
See sec. 446(b); Hallmark Cards, Inc. v. Commissioner, 90 T.C.
26, 31 (1988).
Whether an abuse of discretion has occurred depends upon
2Sec. 446 provides in pertinent part:
SEC. 446. GENERAL RULE FOR METHODS OF ACCOUNTING
(a) General Rule.--Taxable income shall be computed under
the method of accounting on the basis of which the taxpayer
regularly computes his income in keeping his books.
(b) Exceptions.–-If no method of accounting has been
regularly used by the taxpayer, or if the method used does not
clearly reflect income, the computation of taxable income shall
be made under such method as, in the opinion of the Secretary,
does clearly reflect income.
(c) Permissible Methods.–-Subject to the provisions of
subsections (a) and (b), a taxpayer may compute taxable income
under any of the following methods of accounting--
(1) the cash receipts and disbursements method;
(2) an accrual method;
(3) any other method permitted by this chapter; or
(4) any combination of the foregoing methods permitted
under regulations prescribed by the Secretary.
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