-165-
(1) The overall plan of accounting for gross income or deductions
and (2) the treatment of a material item. Sec. 1.446-1(a)(1),
Income Tax Regs.; see also FPL Group, Inc. & Subs. v.
Commissioner, 115 T.C. 554, 561 (2000). The regulations provide
further that an item is material if it involves the proper timing
of income or expense; i.e., when an item is included in income or
is taken as a deduction. Sec. 1.446-1(e)(2)(ii)(a), Income Tax
Regs.; see also FPL Group, Inc. & Subs. v. Commissioner, supra at
561; Wayne Bolt & Nut. Co. v. Commissioner, 93 T.C. 500, 510
(1989). As construed by the courts, section 1.446-1(a), Income
Tax Regs., serves to classify as a “method of accounting” the
consistent treatment of any recurring, material item, whether
that treatment be correct or incorrect. E.g., FPL Group, Inc. &
Subs. v. Commissioner, supra at 561; H.F. Campbell Co. v.
Commissioner, 53 T.C. 439, 447 (1969), affd. 443 F.2d 965 (6th
Cir. 1971).
Here, FNBC’s reporting of income under section 475 is a
method of accounting in that it involves the proper timing of
income and expenses connected with FNBC’s swaps. Section
475(a)(2) mandates for each taxable year that the fair market
value of FNBC’s swaps be considered received as of the end of the
last business day of that year, and that any gain or loss be
currently recognized. Thus, under the statute, FNBC’s valuation
method affects the timing of its swaps income in that the method,
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