In general, taxable income is required to be computed under the method of accounting used by a taxpayer in maintaining its books, except as otherwise required by the Internal Revenue Code (IRC or Code) or Treasury regulations (IRC §446(a)). Consequently, a taxpayer that consistently applies generally accepted accounting principles (GAAP) in computing its income from a business for purposes of its financial statements ordinarily will use that same method in computing its taxable income. If, however, that method “does not clearly reflect income,” the computation of taxable income must be made under such method as, in the opinion of the Commissioner, does clearly reflect income (IRC §446(b)).
Continuing Life Communities Thousand Oaks, LLC v. Commissioner (TC Memo 2022-31) considers the scope of the power of the Commissioner to impose a different accounting method with respect to upfront fees not included in income at the time of payment. In this case it was undisputed that the petitioner (“Continuing Life,” a limited liability company classified as a partnership for tax purposes) used a method permitted by GAAP, but the IRS believed that the method did not clearly reflect income.