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accounting for interest expense was changed and that the
adjustment was appropriate. Before the Court of Appeals for the
Seventh Circuit, the taxpayer argued, inter alia, that the
improper accrual was not a change of accounting method but was a
change of a single item. The court disagreed and explained:
Section 446(c) defines accounting methods which
may be used in computing taxable income. Among
those included are “(1) the cash receipts and
disbursements method; (2) an accrual method; * * *
(4) any combination of the foregoing methods
permitted under regulations prescribed by the
Secretary or his delegate.” An item which has
been improperly accrued before it is due would be
included in “any combination of the foregoing
methods.” [Id. at 1344 (citing Graff Chevrolet Co.
v. Campbell, 343 F.2d 568, 569-571 (5th Cir.
1965)); see sec. 446(c).]
Accordingly, the court held that the Commissioner changed the
taxpayer’s method of accounting for interest expense and applied
section 481, stating:
When a taxpayer uses an accounting method
which reflects an expense before it is proper to
do so or which defers an item of income that
should be reported currently, he has not succeeded
(and does not purport to have succeeded) in
permanently avoiding the reporting of any income;
he has impliedly promised to report that income at
a later date, when his accounting method, improper
though it may be, would require it. Section 481,
therefore, does not hold the taxpayer to any
income which he has any reason to believe he has
avoided, and does not frustrate the policy that
men should be able, after a certain time, to be
confident that past wrongs are set at rest. [Id.
at 1344.]
Similarly in this case, Color Arts’s method of accounting
for accrued vacation pay has been changed. Before respondent’s
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