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on his books. Sec. 446(a). However, if the method of accounting
employed by the taxpayer does not clearly reflect income, “the
computation of taxable income shall be made under such method as,
in the opinion of the Secretary, does clearly reflect income.”
Sec. 446(b). Respondent adjusted Color Arts’s income concluding
that it was improperly deducting accrued vacation pay.5
The parties agree that Color Arts’s method of computing its
deduction for vacation pay was incorrect. However, the parties
disagree on how this error should be perceived and thus labeled.
Respondent argues that he changed Color Arts’s method of
accounting, and petitioner argues that Color Arts merely
“overlooked” a fact in computing the deduction. Petitioner
contends that Color Arts made a factual error in preparing its
1996 income tax return when it overlooked the fact that employees
had to be employed on the first working day of 1997 in order to
earn vacation pay attributable to work performed in 1996. As
discussed infra, we agree with respondent that Color Arts’s
method of accounting for vacation pay was changed.
5Respondent has broad authority to change Color Arts’s
method of accounting if in his opinion it does not clearly
reflect income. Thor Power Tool Co. v. Commissioner, 439 U.S.
522, 540 (1979).
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