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built-in gain or loss include the accrual method rule. Id.
Under the accrual method rule, any item of income properly taken
into account during the recognition period is recognized built-in
gain if an accrual method taxpayer would have included it in
gross income before the beginning of the recognition period.
Sec. 1.1374-4(b)(1), Income Tax Regs.
We have previously decided two cases holding that certain
section 481 adjustments are recognized built-in gain under
section 1374. Argo Sales Co. v. Commissioner, 105 T.C. at 86;
Rondy, Inc. v. Commissioner, T.C. Memo. 1995-372, affd. without
published opinion 117 F.3d 1421 (6th Cir. 1997). These cases
arose before the regulations under section 1374 were effective,
however. The taxpayer in Argo Sales Co. spread its section 481
adjustment over 6 years under the applicable revenue procedure.
In the fourth year of that 6-year period, it converted to S
corporation status. We examined the legislative history of
section 1374(d)(5) and decided that the section 481 adjustment
was properly built-in gain under section 1374 because the
adjustment came squarely within the description of “any item of
income” under section 1374(d)(5). Argo Sales Co. v.
Commissioner, supra at 91-92. In Rondy, Inc., a case involving
similar facts, we explained that section 481 adjustments were
intended to prevent the omission of items from corporate income
taxation. In addition, we explained that the section 481
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