Dow A. and Sandra E. Huffman, et al. - Page 28

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          II.  Sections 446 and 481                                                   
               A.  Section 446                                                        
               Section 446 prescribes certain rules with respect to methods           
          of accounting:  A taxpayer computes its taxable income in                   
          accordance with its method of accounting, see sec. 446(a), and has          
          some discretion in choosing a permissible method of accounting, see         
          sec. 446(c).  Nevertheless, no method of accounting is acceptable           
          unless, in the opinion of the Commissioner, it clearly reflects             
          income.  Sec. 1.446-1(a)(2), Income Tax Regs.; see sec. 446(b).             
          The regulations interpret the term “method of accounting” to                
          include not only the taxpayer’s overall method of accounting but            
          also the taxpayer’s accounting treatment of “any item.”  Sec.               
          1.446-1(a)(1), Income Tax Regs.  In general, a taxpayer wishing to          
          change its method of accounting must obtain the prior approval of           
          the Commissioner.  See sec. 446(e); sec. 1.446-1(e)(2)(i), Income           
          Tax Regs.  The regulations give guidance, but no comprehensive              
          definition, as to what constitutes a change in method of                    
          accounting.  The regulations provide a rule of inclusion:                   
               A change in the method of accounting includes a change in              
               the overall plan of accounting for gross income or                     
               deductions or a change in the treatment of any material                
               item used in such overall plan.  Although a method of                  
               accounting may exist under this definition without the                 
               necessity of a pattern of consistent treatment of an                   
               item, in most instances a method of accounting is not                  
               established for an item without such consistent                        
               treatment.  A material item is any item which involves                 
               the proper time for the inclusion of the item in income                
               or the taking of a deduction.  Changes in method                       
               of accounting include * * * a change involving the method              





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