                       T.C. Memo. 1998-223



                     UNITED STATES TAX COURT



              JIM TURIN & SONS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17643-96.                      Filed June 24, 1998.



     Norman Sepenuk and Gary P. Compa, for petitioner.

     Kathey I. Shaw and Shirley M. Francis, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     PARR, Judge:   Respondent determined deficiencies in

petitioner's Federal income tax for taxable years 1987, 1988,

1990, 1991, and 1993 in the amounts of $378, $302, $23,269,

$39,561, and $20,770, respectively.

     All section references are to the Internal Revenue Code in

effect for the taxable years in issue, and all Rule references
                                - 2 -


are to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated.

     After a concession,1 the issue for decision is:     Whether

respondent's determination that petitioner must change from the

cash method of accounting to the accrual method of accounting was

an abuse of discretion.   We hold it was.

     Some of the facts have been stipulated and are so found.

The stipulated facts and the accompanying exhibits are

incorporated herein by this reference.      At the time the petition

in this case was filed, petitioner's principal place of business

was located in Sandy, Oregon.

                          FINDINGS OF FACT

     Petitioner is a corporation engaged in the business of

providing asphalt paving services.      A sister corporation, Mt.

Hood Asphalt (Mt. Hood), manufactures asphalt.      On an as-needed

basis, petitioner purchases asphalt from Mt. Hood at

approximately $19 per ton.   Mt. Hood also sells asphalt to its

other customers at approximately $23 per ton.

     When bidding on a contract or job, petitioner prices the

asphalt at cost.   Since petitioner can generally purchase asphalt

at a lower cost, it has a competitive advantage over other paving

     1
          Respondent concedes a repairs expense adjustment for
1991 of $18,800 and related adjustments for depreciation expenses
for 1991, 1992, and 1993. In light of this concession, and
previously agreed adjustments set forth in the statutory notice
of deficiency, a Rule 155 computation is necessary.
                                - 3 -


contractors in bidding on a contract.    This competitive

advantage, the difference between petitioner's cost of asphalt

and the price other paving contractors have to pay for asphalt,

is passed along to the customer.    If petitioner marked up the

asphalt, it would have no competitive advantage in bidding on

contracts.    On some jobs, petitioner purchases asphalt from third

parties.    In bidding on contracts where asphalt is purchased from

third parties, the asphalt is also bid at cost.

     Over the years, petitioner has developed its own method for

determining the profit necessary for a normal job.    This method

is to charge approximately $3,000 for a full paving crew for 1-

day's work.    This $3,000 per day will cover petitioner's office

overhead and provide sufficient profit to keep petitioner in

business.    The base $3,000 per day figure is then sometimes

modified depending on competitive conditions.    If petitioner is

very busy or has some other competitive advantage such as

location and is requested to bid on a job, petitioner may bid

substantially higher than $3,000 per day.    Conversely, if

business is slow, or for some other reason, petitioner may bid

substantially below $3,000 per day to get the job.    Whatever the

job, asphalt is always priced at cost, and the income earned on a

particular job or contract bears no relation to the amount of

asphalt used.
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     In performing its paving contracts, petitioner takes

delivery of the asphalt when its temperature is between 300 and

320 degrees Fahrenheit.   If the asphalt is not on the ground and

rolled by the time it is 150 degrees, it can no longer be used.

Under normal circumstances, the window of opportunity is

approximately 3 hours.

     Petitioner has approximately 100 to 150 jobs or contracts

per year of varying size and complexity.   Generally, petitioner

does not get paid until it completes a job.   When a job is

finished, petitioner bills the customer and requires payment

typically within 30 days.

                              OPINION

     Respondent determined that for the taxable years 1990, 1991,

and 1993,2 petitioner's asphalt was merchandise that was an

income-producing factor, that petitioner therefore had

inventories, and thus it must use the accrual method of

accounting in order to clearly reflect taxable income.

     The principal issue for decision is whether it was an abuse

of respondent's discretion to require petitioner to change from

the cash method of accounting to the accrual method of

accounting.   Subsumed in this issue is the question of whether


     2
          Although the statutory notice of deficiency in the
instant case covered 1987, 1988, 1990, 1991, and 1993, respondent
did not change petitioner's method of accounting for 1987 and
1988.
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petitioner should be required to use inventories for tax

purposes.

     By regulation, the Secretary has determined that inventories

are necessary if the production, purchase, or sale of merchandise

is an income-producing factor.    Sec. 1.471-1, Income Tax Regs.

Although not specifically defined in the Internal Revenue Code or

the regulations, courts have held that "merchandise", as used in

section 1.471-1, Income Tax Regs., is an item acquired and held

for sale.   See, e.g., Wilkinson-Beane, Inc. v. Commissioner, 420

F.2d 352, 354-355 (1st Cir. 1970), affg. T.C. Memo. 1969-79.

     A taxpayer that has inventories is required to use the

accrual method of accounting, unless it can show that the use of

another method (here, the cash method) would produce a

substantial identity of results and that the Commissioner's

determination requiring a change is an abuse of discretion.

Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C. 367, 377

(1995); see also Knight-Ridder Newspapers, Inc. v. United States,

743 F.2d 781, 789, 791-793 (11th Cir. 1984); Wilkinson-Beane,

Inc. v. Commissioner, supra.

     We find as fact that emulsified asphalt, which becomes

useless in approximately 3 hours, is not merchandise held for

sale by petitioner.    See Galedrige Constr., Inc. v. Commissioner,

T.C. Memo. 1997-240.   We further find as fact that petitioner has

no inventories; thus, section 1.471-1, Income Tax Regs., does not
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apply to petitioner for the taxable years at issue.     In addition,

we find that petitioner's method of accounting clearly reflects

income, and that it was an abuse of respondent's discretion to

require petitioner to use the accrual method of accounting.3    See

Galedrige Constr., Inc. v. Commissioner, supra.

     For the foregoing reasons,



                                           Decision will be entered

                                      under Rule 155.




     3
          Respondent acknowledges that the facts of the instant
case and Galedrige Constr., Inc. v. Commissioner, T.C. Memo.
1997-240, are similar. Notwithstanding this acknowledgment,
respondent attempts to distinguish Galedrige Constr., Inc. from
the instant case. We find these distinctions unconvincing.
