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The Commissioner of Internal Revenue possesses broad powers in determining whether accounting methods used by a taxpayer clearly reflect income. Ordinarily, a method of accounting which reflects a consistent application of generally accepted accounting principles will be regarded as clearly reflective of income. The Commissioner's broad authority to determine whether a taxpayer's accounting method clearly reflects income is limited, in that he may not reject, as not providing a clear reflection of income, a method of accounting employed by the taxpayer which is specifically authorized in the Internal Revenue Code or regulations and has been applied on a consistent basis.
The corporation manufactured and sold seasonal items. The corporation developed difficulties regarding the storage and shipping of Valentine's Day items. To alleviate the problem, the corporation shipped the items to the buyers during the later part of the year preceding Valentine's Day. The terms of the sale provided that title of the goods did not pass to the buyers until January 1st of the following year. The Commissioner of Internal Revenue alleged that the corporation was deficient in its taxes because the income from the Valentine's Day sales was accruable as of December 31 of the year in which the merchandise was shipped.
Was the income from the sale of Valentine merchandise properly reported by petitioner, a calendar year taxpayer, in the year in which title and risk of loss pass to the purchaser?
The court determined that the corporation was not deficient because it properly calculated the income from the Valentine's Day sales in the year in which title and risk of loss passed to the buyer. The corporation's rights under the Valentine's Day sales contracts did not mature until January 1 of the new year. Only at that point did the corporation relinquish the benefits and burdens of ownership of the merchandise in exchange for a right to receive payment.