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flatwork. Petitioner reported as cost of goods sold the total
cost of all material used in its construction activity during the
taxable year at issue, $993,777. This sum comprised the
following amounts:
Item Amount Percentage
Concrete $642,923 64.7
All other material1 334,563 33.7
Lumber2 16,291 1.6
Total 993,777 100.0
1"All other material" is all the other material that went
into construction of the foundations and flatwork, except the
concrete; it includes fill sand, drain rock, and the various
hardware items. According to the typical bid worksheet, the cost
of the hardware items is 5.07 percent of the contract price (the
total cost of the materials, other than concrete and fill sand,
$81.94 ($69.44 plus $7.70 plus $4.80) divided by the contract
price,$1,615.28), and 9.59 percent of the total cost of the
materials ($81.94 divided by $854.74).
2Respondent stipulated that the lumber is a supply.
Petitioner's accounts receivable and accounts payable at the
end of the taxable year at issue were $294,436 and $60,143,
respectively.
OPINION
We must decide whether the provision of material by
petitioner in performing its service contracts is the sale of
"merchandise" for purposes of section 1.471-1, Income Tax Regs.
We decide this issue in the context of whether it was an
abuse of respondent's discretion to exercise his authority under
section 446 to require petitioner to change from the cash method
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