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Thus, the $271,671.04 deduction for vacation pay was prematurely
claimed on Color Arts’s 1995 return and should have been deducted
on Color Arts’s 1996 return. Respondent did not examine Color
Arts’s return for any period before 1996.3
Color Arts never requested consent from respondent to change
its method of accounting for vacation pay for 1996.
Discussion
1. Color Arts’s Entitlement to Deduction of Accrued
Vacation Pay
In the petition, petitioner argues that Color Arts is
entitled to claim on its 1996 return a deduction of $271,671.04
for vacation pay properly accrued in 1996. For support,
petitioner looks to section 461(a) and the regulations
promulgated thereunder. Petitioner argues that under the “all
events” test the $271,671.04 of vacation pay accrued in 1996.
Secs. 461(h); 1.461-1(a)(2), Income Tax Regs. Respondent does
not dispute petitioner’s contention; his briefs assume Color
Arts’s entitlement to the $271,671.04 deduction in 1996.
However, respondent argues that since Color Arts’s method of
accounting for accrued vacation pay has been changed, an
3The period of limitations on assessment for taxable years
before 1996 has expired.
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