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1(e)(2)(ii), Income Tax Regs., that consistency in matters of
timing defines a method of accounting.15 For example, in Primo
Pants Co. v. Commissioner, 78 T.C. 705 (1982), the petitioner
arbitrarily valued its finished goods inventory at 50 percent of
selling price and its materials and work in process inventories at
50 percent of cost. The taxpayer contended that the Commissioner’s
adjustments to those values, eliminating the unwarranted discounts
(and making certain other changes), were not a “change in the
treatment of any material item”. Id. at 722. In making that
assertion, the taxpayer argued that its discounting practices had
nothing to do with proper time for reporting income. Id. We
reached the opposite conclusion, based on our inquiry whether the
taxpayer’s discounting practices caused its lifetime income to be
underreported or merely shifted the time at which some of that
income was reported. Id. at 723. We concluded: “Because we are
here dealing with inventory, where one year’s closing inventory
becomes the next year’s opening inventory, we are satisfied that
the present case involves only postponement of income and therefore
involves a timing question.” Id. Primo Pants Co. has been
extensively cited, and we have applied a similar analysis in other
cases to conclude that a change from a flawed method of determining
15 We have held that consistent treatment of an item is
shown by two or more taxable years of application. Johnson v.
Commissioner, 108 T.C. 448, 494 (1997), affd. in part and revd.
in part 184 F.3d 786 (8th Cir. 1999).
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