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test cycles “or the equivalent of up to four (4) years of garment
service life”.
Financial and Tax Accounting
Petitioner maintained its books and records using the
accrual method of accounting for financial accounting and tax
accounting purposes. Petitioner’s fiscal year ended on the last
full business week of the calendar year, and petitioner’s tax
year ended on December 31.
Petitioner’s audited financial statements explain the method
that petitioner used to account for the cost of its merchandise
as follows:
The Company charges to expense the cost of manufactured
and purchased garments and other rental merchandise
when placed in service. Purchased garments are
included in prepaid expenses * * *.
Petitioner used this method consistently from year to year and
for more than 30 years.
Prior Tax Audits
In 1968, respondent conducted an examination of petitioner’s
Federal income tax returns for 1966 and 1967 and required that
petitioner change the method by which the cost of the garments
and dust control items was deducted. Respondent required
petitioner to treat one-half of the cost of purchases during the
month of December as inventory on hand at the end of the year.
This method was meant to approximate a deduction for when items
are placed in service rather than when purchased or manufactured.
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Last modified: May 25, 2011