Tax Court reaches different conclusions on use of cash method.

• Author: Tapajna, Joseph J.

In Von Euw & L.J. Nunes, TC Memo 2000-14, and RACMP Enterprises, 114 TC No. 16, the Tax Court considered whether taxpayers sold merchandise and thus were required to report income on the accrual method. These cases are significant in that they provide further clarification on what constitutes merchandise.

In Von Euw & L.J. Nunes, a cash-method taxpayer was in the business of hauling sand and gravel for various contractors and developers. For certain customers, the taxpayer purchased and delivered the materials, while other customers purchased the materials directly and the taxpayer delivered them. The IRS argued that the taxpayer was a seller of merchandise and had to account for inventories, thus requiring use of the accrual method. The taxpayer argued that it was primarily a service provider, purchasing materials for customers as an accommodation. In addition, it argued that it made the same profit whether it purchased and delivered the materials or merely delivered them to customers.

The court found that the taxpayer was a seller of merchandise and required to use the accrual method. In so doing, the court noted that the taxpayer's profit was higher when it purchased and delivered the materials rather than when it merely delivered them. Because the materials were not an indispensable and inseparable part of the delivery of materials, the taxpayer was a seller of merchandise. The court distinguished this case from RACMP, noting that the materials were indispensable to the services the taxpayer provided in that case, while, in Von Euw & L.J. Nunes, customers were purchasing materials from the taxpayer. Finally, the court concluded that the sand and gravel was an income-producing factor in the taxpayer's business, as it met the test in Wilkinson-Beane, TC Memo 1969-79.

In RACMP,, a cash-method taxpayer was in the business of constructing sidewalks and driveways for developers. It would submit bids that included the costs of...