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erroneous method of accounting for vacation pay since at least
1994.9 Since the record is silent, we assume that on its 1994
return Color Arts also prematurely claimed a deduction for
vacation pay which (under the corrected method) should have been
claimed on its 1995 return. On its 1995 return, Color Arts
prematurely claimed a $271,671.04 deduction for vacation pay.
Respondent examined only Color Arts’s 1996 return.10 Respondent
concluded, and petitioner agrees, that the $245,000 deduction for
accrued vacation pay claimed by Color Arts on its 1996 return
should have been claimed on Color Arts’s 1997 return.
The record demonstrates that Color Arts consistently claimed
a deduction for vacation pay a year before its proper accrual,
and there is no evidence that any vacation pay deductions are
lost by the imposition of the section 481(a) adjustment.
However, the failure to impose such an adjustment will allow
Color Arts to keep the $271,671.04 deduction it claimed in 1995
in addition to the $271,671.04 deduction in 1996.
Conclusion
We hold that Color Arts’s method of accounting for its
vacation pay has been changed. Color Arts is entitled to a
9The record does not indicate how long Color Arts has
employed the erroneous method of premature deduction. Given our
reasoning, infra, we do not think this absence is of substantive
significance.
10See supra note 3.
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