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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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