- 5 -
made two positive (increase to income) adjustments to Diehl’s
reported taxable income to reflect this determination. First,
respondent made a $206,108 adjustment under section 481(a) to
reflect the effect of the change from the cash method to an
accrual method as of June 1, 1994:
Application of Application of
cash method accrual method Difference
Accounts receivable -0- $260,527 $260,527
Interest receivable -0- 38,769 38,769
Prepaid expenses $11,647 173,460 161,813
Prepaid advertising -0- (159,700) (159,700)
Accounts payable (8,208) (103,509) (95,301)
Total 3,439 209,547 206,108
Second, respondent made a $214,309 adjustment to reflect the
current year’s application of an accrual method to the following
items:
Balance on Balance on
June 1, 1994 May 31, 1995 Difference
Accounts receivable $260,527 $522,775 $262,248
Interest receivable 38,769 7,817 (30,952)
Prepaid expenses 173,460 64,495 (108,965)
Prepaid advertising (159,700) (54,240) 105,460
Accounts payable (103,509) (116,991) (13,482)
Total 209,547 423,856 214,309
OPINION
Petitioner argues that respondent abused his discretion when
he determined that Diehl must change from its hybrid method to an
accrual method. Petitioner generally makes four assertions in
support of its argument. First, petitioner asserts that the cash
method is listed in section 446(c) as a permissible method of
accounting and that a taxpayer who consistently uses the cash
method may continue to use that method until it fails the $5
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