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Petitioner works on several jobs at a time. Petitioner's
contracts generally provide for progress billing on the 25th day
of each month. In most cases, petitioner sends its customers a
bill once a month until a job is complete. Petitioner's vendors
allow 30 days for payment of any materials petitioner orders.
Petitioner generally tries to ship any materials ordered for a
particular job directly to the job site on or about the 20th day
of each month, so that it is not responsible for paying vendor
bills until the 20th of the following month.
Petitioner had $2,115,291 in gross receipts for the taxable
year in issue. Petitioner's material costs2 for the taxable year
amounted to 33 percent of its gross receipts. Petitioner's cost
of good sold (COGS) was $1,835,723.3
OPINION
Issue 1. Whether It Was an Abuse of Respondent's Discretion To
Require Petitioner To Change From the Cash Method of Accounting
to an Accrual Method of Accounting
Respondent determined that the cash receipts and
disbursements method of accounting used by petitioner for income
tax purposes does not clearly reflect income. Specifically,
respondent claims that petitioner must use inventories, and
2 On its tax return for the year in issue, petitioner reported
material costs of $701,320.
3 On its tax return for the year in issue, petitioner included
the following items in its COGS computation: Material purchases,
labor, equipment, subcontractor payments, depreciation, payroll
taxes, insurance, operating expenses and other miscellaneous
expenditures.
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