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c. Cost of Sales 5/31/96 $1,477,361.00
5/31/97 $2,419,747.00
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.
[Emphasis added.]
The language regarding the adjustments to the cost of sales
specifically refers to the value of petitioner’s inventories.
We find respondent determined in the notice of deficiency that
petitioner is required to maintain inventories. This is not a
new issue.
III. Whether Petitioner’s Accounting Method Clearly Reflects
Income
A. Applicable Law
Respondent asserts that the cash method does not clearly
reflect petitioner’s income. Under section 446,7 the
7 Sec. 446 provides in pertinent part:
SEC. 446(a). General Rule.--Taxable income shall
be computed under the method of accounting on the basis
of which the taxpayer regularly computes his income in
keeping his books.
(b) Exceptions.--If no method of accounting has been
regularly used by the taxpayer, or if the method used 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.
(c) Permissible Methods.--Subject to the provisions of
subsections (a) and (b), a taxpayer may compute taxable
income under any of the following methods of accounting--
(continued...)
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