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Beginning in the early 1990's, the Commissioner began to
require contractors to account for the materials used in
construction as merchandise inventory.6
In J.P. Sheahan Associates, Inc. v. Commissioner, supra, a
roofing company argued that because it ordered materials only on
an “as needed” basis (leftover materials were either returned to
the supplier for credit or held by the taxpayer at one of its
base locations until shipped to a job site), it had no yearend
inventory and therefore did not hold merchandise for sale within
the meaning of the regulations. The Court said:
In so contending, petitioner ignores the fact that the
regulations speak in terms of “every case in which the
production, purchase, or sale of merchandise is an
income-producing factor.” This is the foundation for
the determination by respondent, pursuant to section
471, that inventories should be used; the fact that
such use may produce a zero or minimal year-end
inventory is irrelevant. [Citations omitted.7]
Under J.P. Sheahan Associates, Inc., it is irrelevant
whether the taxpayer has merchandise on hand at the end of the
year for the determination that it must "utilize the inventory
method in computing its taxable income." Id. Thus, the fact
that petitioner had no emulsified asphalt on hand at the end of
6 See Nolan, "Can the Cash Method of Accounting Clearly
Reflect Income?" Tax Notes 1063 (Feb. 24, 1997).
7 In so holding, the Court distinguished as dicta certain
language in Asphalt Prods. Co. v. Commissioner, 796 F.2d 843 (6th
Cir. 1986), affg. in part and revg. in part Akers v.
Commissioner, T.C. Memo. 1984-208.
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