Adoption of and change in accounting methods;

              Adoption of and Change in Accounting Methods
BY FRED A. GOULETTE Principal, Los Angeles Office
Presented before technical conferences of The California Society of Certi­fied
Public Accountants, Los Angeles and San Francisco —November 1960
All OF us are well aware, I am sure, that what we may consider to be a sound, and sometimes even necessary, accounting method for book and financial statement purposes may not be acceptable for tax purposes. For example, setting up reserves would come under this heading. Also, while a faulty accounting method may be easily cor­rected
for book purposes by disclosing in the audit report the effect of the change, such change may not be as easily made for tax purposes because of the necessity for obtaining I.R.S. approval or because some of the years affected may be closed by the statute of limitations. So, I am going to try in the next few minutes to dispel some of the fog sur­rounding
certain areas of this subject.
It seems to me this discussion can be logically approached by examining the various aspects of tax accounting methods in the following order:
1. Accounting methods that may be initially adopted by the tax­payer
without prior approval by the I.R.S.
2. Change in accounting method.
3. Correction of the accounting with respect to a particular item of income or deduction.
4. Continuation of the use of an accounting method by a successor corporation in certain reorganizations.
5. Latest developments.
As a general rule a taxpayer can initially adopt for tax purposes the regular method of accounting used in keeping his books provided such method clearly reflects income. Thus, if the books are kept by the consistent application of generally accepted accounting principles usually employed for the particular trade or business, income will normally be considered to be clearly reflected and the method will not be challenged.
Since passage of the 1954 Code, in addition to the cash method
ADOPTION OF ACCOUNTING METHOD
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