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its first taxable year commencing January 1, 1985, and that
thereafter it consistently accounted for its accrued interest
from the date of the acquisition of the mortgages until the
foreclosures on the underlying real estate. Petitioner argues:
It is long established law that when an entity
becomes taxable for the first time, its adjusted cost
basis in its assets, as of the date on which it becomes
subject to federal income tax must be determined by
reference to events that occurred during the pre-
taxable period, using consistently the tax accounting
method adopted by the taxpayer. * * *
We might agree that petitioner’s argument is correct in
certain specific circumstances;10 however, we cannot agree that
petitioner’s supposition merits recognition as a rule of general
application. In the instant cases, we are dealing with a
regulatory provision which requires that accrued, but unpaid,
interest be returned as income as a condition precedent to the
inclusion of that interest amount in the taxpayer’s regular
adjusted cost basis. Petitioner has not returned its accrued
interest as income for taxable years before January 1, 1985; it
does not meet the requirement stated in section 1.166-6(a)(2),
10See, e.g., sec. 1016(a)(3) (providing an adjustment for
previously tax-exempt individuals or organizations for
exhaustion, wear and tear, obsolescence, amortization, and
depletion, to the extent sustained for any period in which such
individuals or organizations were not subject to taxation); Fed.
Home Loan Mortgage Corp. v. Commissioner, 121 T.C. 128 (Sept. 4,
2003). Sec. 1.166-6(a)(2), Income Tax Regs., provides no
comparable adjustment to regular adjusted cost basis for interest
which accrued during a period in which a taxpayer was tax exempt.
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