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records on the cash method, and it files its Federal income tax
return using a fiscal year ending June 30.
In Galedrige I, respondent determined that during the years
in issue petitioner's asphalt was merchandise that was an income-
producing factor, that petitioner therefore had inventories, and
thus, that it must use the accrual method of accounting in order
to clearly reflect taxable income. Accordingly, respondent
determined deficiencies in petitioner's Federal income tax for
taxable years ended June 30, 1989 and 1990, of $111,613 and $775,
respectively. Respondent also determined a $27,903 section 6661
addition to petitioner's tax for taxable year 1989.3
In Galedrige I, we found that emulsified asphalt, which
becomes useless in less than 5 hours, is not merchandise held for
sale by petitioner. Furthermore, as petitioner had no
inventories, we held that it was not required to use an inventory
method of accounting, that its method of accounting clearly
reflected income, and that under these facts it was an abuse of
discretion for respondent to require petitioner to change its
method of accounting. Due to our holding, we did not need to
address the issue of whether petitioner was liable for an
3 Sec. 6661 was repealed applicable for returns the due
date for which (determined without regard to extensions) is after
Dec. 31, 1989. Omnibus Budget Reconciliation Act of 1989, Pub.
L. 101-239, sec. 7721(c)(2), 103 Stat. 2399. Petitioner’s 1989
fiscal year ended June 30, 1989; thus, its return was due
(without regard to extensions) on Sept. 15, 1989. See sec.
6072(b). Therefore, sec. 6661 is applicable.
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