Galedrige Construction, Inc. - Page 4

          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               3  Sec. 6661 was repealed applicable for returns the due               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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