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States, 209 Ct. Cl. 559, 532 F.2d 1352 (1976), to support their
position that respondent merely corrected mathematical errors and
there were no accounting method changes. In Korn Indus., Inc. for
4 consecutive years, the taxpayer, a furniture manufacturer,
deviated from its long-established method of valuing inventories.
For those 4 years, the taxpayer improperly omitted certain costs
from the value of its finished goods inventory, which caused a
correspondingly improper addition to the cost of goods sold and,
thus, an understatement of gross income. On its tax return for the
fifth year, the taxpayer showed a correct beginning inventory,
which included costs that had been omitted from the previous year’s
ending inventory. The taxpayer viewed its action as the correction
of an error and not a change in its method of accounting.
Therefore, it accepted the Commissioner’s adjustments to its
beginning and ending inventories for the 2 preceding years (for
which the period of limitations on assessment and collection had
not run), but it objected to the Commissioner’s section 481
adjustment, which the Commissioner made to account for the
disparity between the taxpayer’s opening inventory for the second
preceding year and its ending inventory for the third preceding
year (which could not be adjusted since the period of limitations
had run). If the taxpayer were right, that its method of
accounting had not changed, it would enjoy, in effect, a double
deduction, to the extent of the costs improperly omitted from
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