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accepted by the developer/customer and, accordingly, for which
income was not reported). All of those items may have had a
significant effect on petitioner’s reportable taxable income.
Again, petitioner has not shown the amount of materials on hand
or work in progress as of the end of the taxable year under
consideration.2
Petitioner, at the end of its very first year in existence,
had accounts receivable of $294,436 on accrual method gross
receipts of $1,798,338; i.e., 16.4 percent of its receipts were
unreported at the end of its taxable year. Moreover, the
accounts receivable of $294,436 was 18.8 percent of the reported
gross receipts, under the cash method, of $1,564,045. If the
taxable income reported by petitioner included the receivables
under the accrual method of income, petitioner would have
reported taxable income of $267,428. Petitioner claimed cost of
goods sold in the amount of $993,777, which resulted in taxable
income on the cash method of $64,806. Any reduction in cost of
goods sold, of course, would increase income. In spite of these
2 The existence of $294,436 in accounts receivable at the
end of petitioner’s very first taxable year may indicate that
petitioner had a substantial amount of completed work and work in
progress for which it had not been paid, but for which it had
deducted the cost of materials. Under the cash method, the
accounts receivable and work in progress for which payment has
not been received are not included in gross receipts. A mismatch
thus occurs by the overstatement of deductions for materials
under the cash method. In this case, the mismatch is potentially
large considering that the accounts receivable represent a large
percentage of the gross receipts for the tax year under
consideration.
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