Herbert C. Haynes, Inc. - Page 13

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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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