Edward G Smith and Jan M. Smith - Page 7

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          because they were purchased and designated for installation for a           
          specific job.                                                               
               For the taxable year 1995, Smith Floors reported gross                 
          receipts of $1,693,669 and cost of goods sold of $1,252,445.                
          Smith Floors computed its cost of goods sold as follows:                    
               Beginning inventory                       $15,000                      
               Purchases                                 686,283                      
               Cost of labor                             386,135                      
          Back charges                 $1,632                                         
               Contract labor               21,402                                    
               Freight                       1,060                                    
          Payroll taxes direct labor   37,941                                         
               Small equipment                 719                                    
               Supplies                     98,405                                    
          Worker’s compensation        18,868                                         
               Total other                              180,027                       
               Total                                   1,267,445                      
               Ending inventory                          (15,000)                     
               Cost of goods sold                     $1,252,445                      

               Section 446(b) provides that, if a taxpayer’s method of                
          accounting does not clearly reflect income, the taxpayer’s                  
          computation of income “shall be made under such method as, in the           
          opinion of the Secretary, does clearly reflect income.”  In                 
          connection with the foregoing, section 471(a) provides the                  
          general rule that a taxpayer is required to take inventories on             
          such basis as the Secretary may prescribe in order to clearly               
          determine the taxpayer’s income.  Thus, the Commissioner is                 
          granted broad discretion to determine whether a taxpayer’s use of           

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