Galedrige Construction, Inc. - Page 14

                    Petitioner’s position has commonsense appeal and                  
               some support in law and in industry practice.  See                     
               Ansley-Sheppard-Burgess Co. v. Commissioner, supra                     
               (Commissioner agreed that taxpayer/contractor did not                  
               have inventory).  Furthermore, until the early 1990's,                 
               the Commissioner generally permitted construction                      
               contractors to account for construction materials and                  
               supplies as supplies, rather than as inventory.  See,                  
               e.g., id. at 375 ("The cash method of accounting has                   
               been widely used throughout the contracting industry                   
               and accepted by respondent since time immemorial.");                   
               Hunt Engg. Co. v. Commissioner, T.C. Memo. 1956-248                    
               (construction contractor purchasing materials for                      
               various jobs as they were needed maintained no                         
               inventories; cash method clearly reflected income).                    
                    Beginning in the early 1990's, the Commissioner                   
               began to require contractors to account for the                        
               materials used in construction as merchandise                          
               inventory.  [Fn. ref. omitted.]                                        
               Therefore, notwithstanding the difficulty in reconciling the           
          authorities on this issue, there was substantial authority as               
          defined in section 1.6661-3(a)(2), Income Tax Regs., for                    
          petitioner's position at the time it filed its return for taxable           
          year 1989.                                                                  
               In his objection to petitioner's motion for reasonable                 
          litigation costs, respondent asserts that respondent's position             
          on the section 6661 issue was substantially justified, and                  
          petitioner, to meet its burden of proof, must show that                     
          "respondent was not substantially justified in including the                
          substantial understatement penalty in the statutory notice of               
          deficiency, and in maintaining that position after District                 
          Counsel received the case."  Thus, respondent contends that "the            

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