United States Tax Court Addressed The Issue Of Misinterpreting Section 446

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In the recent case Hawse, T.C Memo 2015-99, The United States Tax court addressed the issue of misinterpreting section 446(e), and distinguishing between correction of an error and change in method of accounting. The court upheld a $5.4 million tax deficiency judgement against a California auto dealership, JHH Motor Cars Inc. and denied a claim for a refund. According to the judgement of the court, the taxpayer had not received automatic consent from IRS for change of its accounting method from LIFO to specific identification method. But as the taxpayer used the specific identification method for valuing his vehicle inventory for seven years, there was a change in method of accounting.
The taxpayer was the sole shareholder and president of
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1.472-6.
The sale did not occur in 2001 and JHH continued to use the specific identification method for its inventory for 2001 through 2007. But later it tried to amend the tax return for the corresponding years to correct an error of using the specific identification method and reverting back to LIFO inventory method, and requested a refund. After JHH received its refund, IRS sent a notice of deficiency for the years covered under amended returns. JHH filed a petition with the Tax Court.
Issues involved in the case:
i. Whether JHH received automatic consent from IRS to change its method of accounting for its vehicle inventory from LIFO to specific identification method for the tax years in issue. ii. If not, whether JHH changed its method of accounting for 2001 through 2007 notwithstanding its failure to obtain IRS consent. iii. If so, whether there was a second change in its method of accounting when JHH attempted to revert to LIFO method of accounting for its vehicle inventory by filing amended tax returns for 2002 and 2003.
Section 446(a) states that the taxable income of a taxpayer shall be computed on the basis of the accounting method under which he/she computes his/her income regularly in keeping his/her books. Under section 446(e), if the taxpayer desires to change his/her method of accounting, he/she must obtain the consent of IRS before computing his/her taxable income under the new method.
In analyzing the first issue, the
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