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The Conformity Rule of Section 446(a)
The provisions of section 446 spell out the relation-
ship between a taxpayer’s method of accounting for book
purposes and the manner of computing the taxpayer’s taxable
income for tax purposes. The general rule for methods of
accounting, set out in subsection (a), requires a taxpayer
to compute taxable income “under the method of accounting
on the basis of which the taxpayer regularly computes his
income in keeping his books.” Sec. 446(a). The phrase
“income in keeping his books” used in section 446(a) and
(e) refers to net income computed for financial accounting
purposes, in accordance with the generally accepted
accounting principles in a particular trade or business
applied consistently from year to year. See sec. 1.446-
1(a)(2), Income Tax Regs. Thus, subsection (a) of section
446 requires the taxpayer’s method of computing taxable
income to conform to the taxpayer’s method of accounting
for book purposes. We sometimes refer to this general rule
as the conformity requirement.
Courts have consistently held that the conformity rule
of section 446(a) is not an absolute requirement and that
tax accounting requirements may diverge from financial
accounting standards. See, e.g., FPL Group, Inc. &
Subs. v. Commissioner, 115 T.C. 554, 562-563 (2000); US
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