Harry Potter and the Tax Accounting Myths
Leo F. Nolan II
Government of the United States of America - Internal Revenue Service (IRS)
Tax Notes, January 2001
In "Can the Cash Method of Accounting Clearly Reflect Income?" Tax Notes, Feb. 24, 1997, p. 1063, and Mar. 3, 1997, p. 1175, the author described when the Commissioner of Internal Revenue may require cash-method taxpayers, including construction contractors, to use inventory and accrual methods of accounting for the materials they furnish with their services. In "Zen and the Cash Method," Tax Notes, June 26, 2000, p. 1771, the author criticized a new line of cases holding that the materials furnished by construction contractors and some other service providers are not merchandise subject to the inventory regulations. In this third and final article on issues associated with the clear-reflection-of-income standard under section 446(b), the author re-examines two issues mentioned in the previous articles: The commissioner's "broad discretion" to determine whether a taxpayer's method clearly reflects income and the taxpayer's ability to use the "substantial-identity-of-results test" as a "shield" when the commissioner is exercising that discretion.
JEL Classification: M4
Date posted: January 9, 2001
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