-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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