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A special rule may apply where a taxpayer sells merchandise
as part of its ordinary business. Under section 471(a),
Whenever in the opinion of the Secretary the use of
inventories is necessary in order clearly to determine
the income of any taxpayer, inventories shall be taken
by such taxpayer on such basis as the Secretary may
prescribe as conforming as nearly as may be to the best
accounting practice in the trade or business and as
most clearly reflecting the income.
Applicable regulations clarify that a taxpayer must account for
inventories whenever the production, purchase, or sale of
merchandise is an income-producing factor in the taxpayer’s
business. Sec. 1.471-1, Income Tax Regs. Other pertinent
regulations mandate that a taxpayer who is required to maintain
inventories must use an accrual method with regard to purchases
and sales. See sec. 1.446-1(c)(2)(i), Income Tax Regs.
Section 448 does not displace this special rule.3 That
3 Sec. 448 provides:
SEC. 448. LIMITATION ON USE OF CASH METHOD OF
ACCOUNTING.
(a) General Rule.--Except as otherwise provided in
this section, in the case of a--
(1) C corporation,
* * * * * * *
taxable income shall not be computed under the cash
receipts and disbursements method of accounting.
(b) Exceptions.--
* * * * * * *
(3) Entities with gross receipts of not
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Last modified: May 25, 2011