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capitalization rules of section 263A. See secs. 1.471-1,
1.471-2, 1.471-3, 1.471-5, Income Tax Regs.; sec. 1.263A-1T,
Temporary Income Tax Regs., 52 Fed. Reg. 10060 (Mar. 30, 1987).
Respondent failed to comply with the rules for identifying
items properly included in inventory and for properly valuing
inventory items.
a. Items Included in Inventory
Respondent increased petitioner's income for the taxable
year ending May 31, 1991, by $11,000 to reflect a reduction of
petitioner's cost of goods sold to account for inventories
based on the increase in the value of work in process at the
end of the year ($161,000) over the value at the beginning of
the year ($150,000). In making the computation respondent used
the value of the work in process as reflected on petitioner's
balance sheets. During the examination of petitioner's return
for the taxable year at issue, petitioner provided the
following breakdown of the work in process as of June 1, 1991:
Paper $55,000
W.I.P. camera 5,000
W.I.P. press 30,000
W.I.P. bindery 16,000
Jobs completed and shipped 38,000
Jobs ready to bill 13,500
Jobs at outside service 3,500
Total 161,000
Section 1.471-1, Income Tax Regs., provides in part:
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