Paving contractor was not required to use accrual method.

• Jurisdiction: United States
• Author: Fiore, Nicholas J.
• Date: 01 October 2000

The T Corporation provides paving services. When bidding on a contract, T prices the asphalt at cost. Another company ships the asphalt just before a paving job. The physical properties of emulsified asphalt demand that T use it within several hours of shipment; otherwise, it hardens and becomes useless. Once T completes a job, it generally receives payment within 10-30 days of billing.

T used the cash method of accounting, deducting the cost of the asphalt for a paving job immediately on paying for it. T recognized income for a job when it received payment.

The IRS determined that the asphalt was "merchandise" under Regs. Sec. 1.471-1, such that T had inventories and thus was required to use the accrual method. The Tax Court concluded that the Service had abused its discretion, and the Court of Appeals (opinion Tashima, J.) affirm.

Under Regs. Sec. 1.471-1, a taxpayer must use inventories and the accrual method of accounting when the "production, purchase or sale of merchandise is an income-producing factor," to...