Richard D. Hudson and Betty L. Hudson - Page 4

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                                       1987            1988                          
               Gross receipts         $321,596        $371,994                        
               Cost of goods                                                          
               sold                  $257,346        $353,118                         
               Gross profit                                                           
               percentage               20%              5%                           
               Respondent determined that petitioner had no ending                    
          inventory on December 31, 1987, and, consequently, no beginning             
          inventory on January 1, 1988.  The parties have since stipulated,           
          however, that petitioner had $10,000 of inventory on January 1,             
          1988.  Respondent also determined that petitioner had $61,305 of            
          inventory on December 31, 1988.                                             
          1.  Change in Method of Accounting                                          
               We must first decide whether respondent abused her                     
          discretion by changing petitioner from the cash method to an                
          accrual method in order to reflect his inventory, beginning with            
          the 1988 tax year.  We refer to sections 446 and 471 to make our            
               Taxable income generally is computed based on the method of            
          accounting on which the taxpayer regularly keeps his or her                 
          books.  Sec. 446(a).  The term "method of accounting" includes              
          the adjustment of any "material item" involving the proper timing           
          of income and expense.  Sec. 1.446-1(e)(2)(ii)(a), Income Tax               
          Regs.  Inventories are a material item.                                     

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