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D. Petitioner’s Income Tax Returns
Petitioner hired Pearlman, Nebben & Associates, an
accounting firm that specializes in the health care industry, to
prepare its 1995 and 1996 Federal corporate income tax returns.
Petitioner’s director of accounting and chief financial officer
reviewed those returns for accuracy.
Petitioner reported gross receipts of $55,128,001 and
$49,184,394, and taxable income of $284,062 and $420,950 on its
1995 and 1996 returns, respectively.
E. The Notice of Deficiency
Respondent determined that petitioner’s policy of expensing
assets that cost less than $500 was not a proper method of
accounting, and that petitioner must capitalize the cost of the
disputed assets over their useful lives.2
OPINION
A. Whether Petitioner Must Capitalize the Cost of the Disputed
Assets
We must decide whether petitioner, an accrual basis
taxpayer, must capitalize the cost of items that cost less than
$500 and that have a useful life of more than one year.
1. Section 263 and Section 446
In general, amounts paid to acquire machinery and equipment,
furniture and fixtures, and similar property having a useful life
2 Respondent allowed depreciation for the disputed assets
of $72,802 for 1995 and $178,819 for 1996.
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