                        T.C. Memo. 1996-391



                      UNITED STATES TAX COURT



               MILWARD CORPORATION, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16005-93.                     Filed August 21, 1996.



     Meryl Silver, for respondent.



                        MEMORANDUM OPINION


     DAWSON, Judge:   This case was assigned to Special Trial

Judge Robert N. Armen, Jr., pursuant to the provisions of section

7443A(b)(4) and Rules 180, 181, and 183.1     The Court agrees with




     1
        All section references are to the Internal Revenue Code
in effect for the taxable years in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
and adopts the opinion of the Special Trial Judge, which is set

forth below.



                  OPINION OF THE SPECIAL TRIAL JUDGE

        ARMEN, Special Trial Judge:     This matter is before the Court

on respondent's Motion for Summary Judgment.           Respondent moves

for summary judgment that she did not abuse her discretion in

requiring petitioner to remain on the accrual method of

accounting in computing its income taxes.          As explained in

greater detail below, we will grant respondent's motion.

Background2

        Milward Corp. is an electrical contracting firm, organized

as a corporation under the laws of the State of Connecticut, with

its principal place of business in Hartford, Connecticut.

Petitioner's business consists primarily of commercial and

industrial work for new construction.         George O. Milward

(Milward) is petitioner's president and sole shareholder.

Respondent issued a statutory notice of deficiency to petitioner

determining deficiencies in its Federal corporate income taxes

for the taxable years ending January 31, 1988 through 1990, as

follows:


                 Taxable Year Ending         Deficiency

                   Jan. 31, 1988               $1,155
                   Jan. 31, 1989              199,125


    2
      The following is a summary of the relevant facts that do not appear to
be in dispute. They are stated for purposes of deciding the pending motion.
                                  - 3 -


                  Jan. 31, 1990            32,851

The notice of deficiency includes an explanation of the

adjustments that states in pertinent part:

     The cash receipts and disbursements method of
     accounting you used to keep your books and records for
     the January 31, 1989 and January 31, 1990 taxable years
     does not clearly reflect income; however, the accrual
     method of accounting does clearly reflect your income.
     Therefore, your taxable income is increased by
     $541,709.00 and $151,782.00, respectively. * * *

     Due to the increase in your taxable income for the
     taxable year January 31, 1990, you did not incur a net
     operating loss in that year. Since you carried net
     operating losses of $7,700.00 and $10,076.00 back to
     the January 31, 1988 and January 31, 1989 tax returns,
     respectively, your taxable income for the years January
     31, 1988, and January 31, 1989, is increased $7,700.00
     and $10,076.00, respectively.

     Petitioner invoked this Court's jurisdiction by filing a

timely petition for redetermination.      Respondent filed a timely

answer to the petition.

     Following the filing of respondent's answer, counsel for

petitioner moved for (and the Court granted) a stay of

proceedings to permit petitioner to submit an offer-in-compromise

to respondent.    One year later, however, counsel for petitioner

filed a motion to withdraw from the case, asserting that both

petitioner and Milward had failed to respond to his

communications.    We subsequently granted counsel's motion to

withdraw and restored the case to the general docket for trial or

other disposition.
                               - 4 -


     After the case was restored to the general docket,

respondent served petitioner with (1) a request for admissions

(with attached exhibits) pursuant to Rule 90(a), (2)

interrogatories, and (3) a request for production of documents.

At the same time, respondent filed her request for admissions

with the Court pursuant to Rule 90(b).

     Petitioner failed to respond to respondent's discovery

requests.   Further, as a consequence of petitioner's failure to

respond to respondent's request for admissions, each matter set

forth therein was deemed admitted pursuant to Rule 90(c).

Marshall v. Commissioner, 85 T.C. 267, 272 (1985); Morrison v.

Commissioner, 81 T.C. 644, 647 (1983).

     The following is a summary of the matters that petitioner is

deemed to have admitted pursuant to Rule 90(c).

     For the fiscal year ending January 31, 1988, petitioner used

the accrual method of accounting for financial statement purposes

and income tax purposes.   For the fiscal years ending January 31,

1989 and 1990, petitioner utilized the accrual method of

accounting and percentage of completion method for financial

statement purposes and used the cash method of accounting for

income tax purposes.   Petitioner did not file a Form 3115

(Application for Change in Accounting Method) or otherwise seek

respondent's approval to change its method of accounting for
                                - 5 -


either the fiscal year ending January 31, 1989, or the fiscal

year ending January 31, 1990.

     Petitioner reported taxable income in the amount of $114,717

(without regard to any NOL deduction) on its income tax return

(Form 1120) for the fiscal year ending January 31, 1989.

Petitioner reported a loss in the amount of $17,776 on its income

tax return (Form 1120) for the fiscal year ending January 31,

1990.

        Materials that petitioner ordered for specific jobs were

either delivered to petitioner's premises or "drop-shipped" to

the job site, where the materials were stored in petitioner's

containers.    Most of petitioner's materials were ordered FOB-POS;

i.e., free on board--point of shipment.    Petitioner retained

title to materials purchased for a job until the main contractor

or owner of the property approved petitioner's work.

     In some instances, petitioner was able to purchase materials

only in lot sizes larger than those needed for a particular job.

Materials that petitioner purchased for a particular job that

were not used in the project were retained for future jobs.      Any

excess materials remaining at the end of a job either were

collected and sold as scrap by petitioner's employees, who

retained the proceeds, or were removed to petitioner's warehouse.

     Petitioner accounted for the direct and indirect costs

associated with work in progress as costs in excess of billings.
                                 - 6 -


Petitioner received progress payments for work completed.

Petitioner computed its taxable income by deducting the cost of

materials and supplies in the year when they were purchased.

     Petitioner had inventory in the amounts of $73,542 and

$98,194 for the fiscal years ending January 31, 1989 and 1990,

respectively.    Petitioner had no inventory on the first day of

the fiscal year ending January 31, 1989.

     Petitioner's gross receipts, cost of materials, accounts

receivable, and accounts payable for the fiscal years in issue

are summarized as follows:

                              FY 1988      FY 1989      FY 1990

Gross receipts             $1,283,428    $2,720,274   $1,485,687

Cost of materials             250,628       506,881      382,640

Accounts receivable           619,561       589,711      788,156

Accounts payable               117,847       39,993      159,305

Cost of materials as a
  percent of gross receipts     19.5%         18.6%        25.8%

     Deemed admissions aside, respondent filed motions to compel

requesting that the Court direct petitioner to respond to

respondent's interrogatories and request for production of

documents.    We granted respondent's motions to compel and

directed petitioner to respond to respondent's discovery

requests.    Petitioner failed to comply with the Court's order.

     As indicated, respondent filed a Motion for Summary Judgment

seeking judgment in her favor on all issues.     Respondent contends
                                - 7 -


that the matters deemed admitted in this case pursuant to Rule

90(c) establish that petitioner is liable for the deficiencies as

determined by respondent in the notice of deficiency.

     On May 22, 1996, the Court issued an order calendaring

respondent's motion for hearing and directing petitioner to file

a response to respondent's motion by June 17, 1996.      The order

also included a reminder to the parties of the applicability of

Rule 50(c).   Petitioner failed to file a response to respondent's

motion.

     Respondent's motion was called for hearing at the motions

session of the Court held in Washington, D.C., on June 26, 1996.

Counsel for respondent appeared at the hearing and presented

argument in support of the motion.      Petitioner was not

represented at the hearing, nor did it file a statement with the

Court pursuant to Rule 50(c).

Discussion

    Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.      Florida Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).      Summary judgment is

appropriate "if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that a decision may be

rendered as a matter of law."   Rule 121(b); Sundstrand Corp. v.
                              - 8 -


Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th

Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988);

Naftel v. Commissioner, 85 T.C. 527, 529 (1985).   Rule 121(d)

provides:

     When a motion for summary judgment is made and
     supported as provided in this Rule, an adverse party
     may not rest upon the mere allegations or denials of
     such party's pleading, but such party's response, by
     affidavits or as otherwise provided in this Rule, must
     set forth specific facts showing that there is a
     genuine issue for trial. If the adverse party does not
     so respond, then a decision, if appropriate, may be
     entered against such party.

See King v. Commissioner, 87 T.C. 1213, 1217 (1986).

     Based upon our review of the record, we are satisfied that

there is no genuine issue of material fact and that respondent is

entitled to judgment as a matter of law.

     The issue for decision is whether respondent abused her

discretion in requiring petitioner to remain on the accrual

method of accounting in computing its income taxes.    We consider

section 446 in deciding this issue.

     Section 446 provides in pertinent part:

           (a) General Rule.--Taxable income shall be
     computed under the method of accounting on the basis of
     which the taxpayer regularly computes his income in
     keeping his books.

           (b) Exceptions.--If no method of accounting has
     been regularly used by the taxpayer, or if the method
     used does not clearly reflect income, the computation
     of taxable income shall be made under such method as,
     in the opinion of the Secretary, does clearly reflect
     income.
                               - 9 -


          (c) Permissible Methods.--Subject to the
     provisions of subsections (a) and (b), a taxpayer may
     compute taxable income under any of the following
     methods of accounting--

              (1) the cash receipts and disbursements method;

              (2) an accrual method;

              (3) any other method permitted by this chapter; or


             (4) any combination of the foregoing methods
     permitted under regulations prescribed by the
     Secretary.

     In construing section 446, the Commissioner has broad powers

to determine whether accounting methods used by a taxpayer

clearly reflect income.   Commissioner v. Hansen, 360 U.S. 446,

467 (1959).   Courts do not interfere with the Commissioner's

determination unless it is an abuse of discretion.   Thor Power

Tool Co. v. Commissioner, 439 U.S. 522, 532 (1979); Lucas v.

American Code Co., 280 U.S. 445, 449 (1930); Ford Motor Co. v.

Commissioner, 102 T.C. 87, 91 (1994), affd. 71 F.3d 209 (6th Cir.

1995).

     Petitioner changed its method of accounting during the

period in question without obtaining prior approval from

respondent.   In particular, for the fiscal year ending January

31, 1988, petitioner used the accrual method of accounting for

financial statement purposes and income tax purposes.   However,

for the fiscal years ending January 31, 1989 and 1990, petitioner

used the accrual method of accounting and the percentage of
                                - 10 -


completion method for financial statement purposes and used the

cash method of accounting for income tax purposes.     Petitioner

did not file a Form 3115 (Application for Change in Accounting

Method) or otherwise seek respondent's approval to change its

method of accounting.     See sec. 1.446-1(e)(3)(i), Income Tax

Regs.

     Section 446(e) provides that a taxpayer generally is

required to secure the Commissioner's consent before changing its

method of accounting.     See sec. 1.446-1(e)(2)(i), Income Tax

Regs.     Further, section 1.446-1(e)(2)(ii)(a), Income Tax Regs.,

provides that a change from the accrual method to the cash method

of accounting is a change in a taxpayer's method of accounting.

In view of petitioner's failure to obtain consent from respondent

before changing its method of accounting, we sustain as a matter

of law respondent's determination that petitioner must use the

accrual method of accounting for its taxable years ending January

31, 1989 and 1990.

        In order to reflect the foregoing,



                                 An order granting respondent's

                            Motion for Summary Judgment and

                            decision for respondent will be

                            entered.
