Herbert C. Haynes, Inc. - Page 12

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          inventories.  Petitioner argues that this issue is a “new matter”           
          not contained in the notice of deficiency.  Our resolution of               
          this case does not depend on which party bears the burden of                
          proof.  Nonetheless, for the sake of completeness, we will                  
          address this issue.                                                         
               Petitioner bears the burden of establishing that                       
          respondent’s determinations of deficiencies, as contained in the            
          statutory notice of deficiency, are incorrect.  See Rule 142(a);6           
          Welch v. Helvering, 290 U.S. 111 (1933).                                    
               The notice of deficiency states:                                       
                                     Schedule A-1                                     
                                Explanation of Adjustments                            
               a.  Change of Accounting Method5/31/95   $1,576,300.00                  
                                             5/31/96   $1,623,700.00                  
                                             5/31/97   $300,000.00                    
                    The cash receipts and disbursements method of accounting you      
               used to keep your books and records does not clearly reflect           
               income; but the accrual method of accounting clearly reflects your     
               income.  Therefore, your taxable income is increased                   
               $1,576,300.00, $1,623,700.00 and $300,000.00 for 5/31/95, 5/31/96      
               and 5/31/97, respectively.                                             
               b.  Cost of Sales             5/31/95   $1,862,892.00                  
                                             5/31/96   ($1,862,892.00)                
                                             5/31/97   ($1,477,361.00)                
                    Since you are being required to use the accrual method of         
               accounting, the values of your opening and closing inventories for     
               the tax year ending 5/31/95 is $0.00 and $1,862,892.00.  For the       
               tax year ending 5/31/96, your opening and closing inventories are      
               $1,862,892 and $1,477,361.00.  For the tax year ending 5/31/97,        
               your opening and closing inventories are $1,477,361.00 and             
               $2,419,747.                                                            


               6  The examination in this case commenced before July 22,              
          1998.  Accordingly, sec. 7491 is inapplicable.  See Warbelow’s              
          Air Ventures, Inc. v. Commissioner, 118 T.C. 579, 582 n.8,                  
          (2002), affd. 80 Fed. Appx. 16 (9th Cir. 2003).                             





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