Edward G Smith and Jan M. Smith - Page 2

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          EJKC, Inc. (EJKC), an S corporation of which petitioner Edward G.           
          Smith is the sole shareholder, based on respondent’s                        
          determination that EJKC is required to account for inventories              
          and use the accrual method of accounting.1  After a concession by           
          petitioners, the issues for decision are:  (1) Whether EJKC’s               
          contracts to purchase and install flooring materials constitute             
          sales of “merchandise”; and (2) whether respondent abused his               
          discretion in determining that EJKC’s use of the cash method of             
          accounting does not clearly reflect its income.                             
                                  FINDINGS OF FACT                                    
               Some of the facts have been stipulated and are so found.               
          The stipulation of facts and attached exhibits are incorporated             
          herein by this reference.  At the time the petition was filed,              
          petitioners resided in Moreno Valley, California.                           
               Petitioner has 25 years’ experience installing flooring                
          materials such as carpeting, vinyl and ceramic tile, and hardwood           
          flooring (flooring materials).  In 1988, petitioner started his             
          own flooring installation business.  In 1990, petitioner decided            
          to operate the business as an S corporation and filed articles of           
          incorporation for EJKC with the California secretary of state.              
          EJKC conducts business under the fictitious business name of                
          Smith Floors & Installations (Smith Floors).                                

               1  References to petitioner in the singular are to                     
          petitioner Edward G. Smith.                                                 

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