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Washington Tax Alert May 15, 2007 (valuation of property - accounting method)

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com

May 15, 2007

The Court of Appeals for the Fourth Circuit issued an opinion last week holding that a taxpayer's determination of the market value of its accounts receivable under former IRC § 475(a) constituted a method of accounting that could be challenged by the Service as not clearly reflecting income under IRC § 446(b). Heilig Meyers Co. v. Internal Revenue Service (4 th Cir., May 9, 2007). The taxpayer, a retailer of home furnishings, had argued that the case was a dispute over valuation, not a dispute over accounting methods. By framing the issue as one involving an accounting method, the Service was able to take advantage of its broad authority under IRC § 446(b) to reject the taxpayer's accounting method and to substitute its own.

In Heilig Meyers , the taxpayer had determined the market value of its accounts receivable on the basis of a valuation study by Ernst & Young. The court rejected E&Y's valuation as flawed in several respects, including being factually inconsistent with statements the taxpayer had made in its annual report.

In holding that the valuation of property is an accounting method, the court in Heilig followed the decision in Bank One Corp. v. Comm'r , 120 T.C. 174 (2003), aff'd in part, vacated in part sub nom . JPMorgan Chase & Co. v. Comm'r , 458 F.3d 564 (7 th Cir. 2006), which involved the valuation of interest swaps.