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A taxpayer that has inventories is required to use the
accrual method, unless it can show that use of another method
(here, the cash method) would produce a substantial identity of
results and that the Commissioner’s determination requiring a
change is an abuse of discretion. Ansley-Sheppard-Burgess Co. v.
Commissioner, 104 T.C. 367, 377 (1995); see also Knight-Ridder
Newspapers, Inc. v. United States, 743 F.2d 781, 789, 791-793
(11th Cir. 1984); Wilkinson-Beane, Inc. v. Commissioner, 420 F.2d
352 (1st Cir. 1970), affg. T.C. Memo. 1969-79.
A. Merchandise
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 it
must use the accrual method of accounting in order to clearly
reflect taxable income. Petitioner asserts that it is primarily
in the business of providing service; its clients purchase its
expertise in paving. Furthermore, petitioner contends that
4(...continued)
any taxpayer, inventories shall be taken by such
taxpayer on such basis as the Secretary may prescribe
as conforming as nearly as may be to the best
accounting practice in the trade or business and as
most clearly reflecting the income.
By regulation, the Secretary has determined that inventories
are necessary if the production, purchase, or sale of merchandise
is an income-producing factor. Sec. 1.471-1, Income Tax Regs.
Completing the statutory and regulatory scheme, sec. 1.446-
1(c)(2)(i), Income Tax Regs., provides that a taxpayer that has
inventory must also use the accrual method of accounting with
regard to purchases and sales.
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Last modified: May 25, 2011