Galedrige Construction, Inc. - Page 1

                                 T.C. Memo. 1997-240                                  

                               UNITED STATES TAX COURT                                

                     GALEDRIGE CONSTRUCTION, INC., Petitioner v.                      
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 21463-94.                     Filed May 22, 1997.           

                    P, an asphalt paving contractor, did not account for              
               inventories and kept its books and filed its returns on the            
               cash receipts and disbursements method of accounting.  R               
               determined that the sale of merchandise was an income-                 
               producing factor in P's business, that P must, pursuant to             
               sec. 1.471-1, Income Tax Regs., account for inventories, and           
               that P must use the accrual method of accounting to clearly            
               reflect income.                                                        
                    Held: Emulsified asphalt, which becomes useless in less           
               than 5 hours, is not merchandise held for sale by P.  Held,            
               further, P has no inventories; thus, sec. 1.471-1, Income              
               Tax Regs., does not apply to P for the taxable years at                
               issue.  Held, further, P's method of accounting clearly                
               reflects income; R abused her discretion in requiring P to             
               use the accrual method of accounting.                                  

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