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accounting9 from one that clearly reflects income to a method
that distorts income, or, alternatively, that the qualified
advance payment amounts should be fully deductible in the year
paid to Western General. We consider each in turn.
B. Abuse of Discretion
1. In General
Petitioners contend that respondent’s effort to limit their
amortization deduction for insurance costs to a pro rata portion
of the premium in the first year, measured by the portion of the
year for which the policy was actually in force, constitutes an
abuse of discretion. In petitioners’ view, the method of
accounting for insurance costs for multiyear policies that they
employed, which involved deducting a full year’s worth of premium
in the first year, regardless of the actual date of commencement
of coverage, effects a clear reflection of income because it more
closely matches expense with associated income-–given the
requirement of Rev. Proc. 92-98, 1992-2 C.B. 512, that the
corresponding income be recognized under a convention that treats
it as received on the first day of the year without regard to
actual receipt. The method sought by respondent, petitioners
9 The parties do not dispute that the timing of petitioners’
deductions for the amounts paid to Western General constitutes a
“method of accounting” within the meaning of sec. 446. See sec.
1.446-1(a)(1), Income Tax Regs. (“The term ‘method of accounting’
includes not only the over-all method of accounting of the
taxpayer but also the accounting treatment of any item.”).
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