Thompson Electric, Inc V'Commissioner, T'C' Memo 1995292

1
Thompson Electric, Inc V.Commissioner, T.C. Memo
1995-292

• - kabila

2
ISSUE

• Is the IRSs determination that the taxpayer
  must use accrual method of accounting an abuse of
  discretion?
• Can the taxpayer use cash method of accounting
  for some of the income expenses and accrual
  method for the rest?

3
Background

• Thompson Electric Inc Electrical contracting
  services
• Cash method of accounting since 1977
• Installed materials as wiring, light fixtures
  etc., in hotels, new homes, offices .
• Prepares a quote for its customers.
• TP maintained inventory worth
• 4,69,895 - 1987
• 68,617 - 1988
• 74,876 - 1989

4
RELEVANT CODE SECTIONS.

• 446(a) Taxable income shall be computed under the
  method of accounting on the basis of which the tp
  regularly computes his income.
• 446(b) If the method does not clearly reflect
  income then the computation shall be made under
  the method which in the opinion of the secretary
  does clearly reflect income.
• 1.471-1 The tp must use inventories if the
  production, purchase or sale of merchandise is an
  income producing factor.A tp who uses inventories
  must also generally use accrual method of
  accounting.

5
Supply Vs Inventory

• The TP says it did not display its supplies to
  its customers or to the public.
• The supplies were not itemized on the invoices
  no separate charges were made to the customers
  for supplies.
• TPs customers generally do not select the
  materials to be used in performing services.
• Although appropriate factors to consider not
  sufficient to show the abuse of discretion.

6
Cost of materials as a of gross receipts

• Year 1987 1988 1989
• 38 37 44
• Wilkinson Beane Inc V. Commr.
• The for the cost of merchandise was
  15 because of which the court held that it was
  income producing factor .

7
Substantial Identity of Results

• TP did not prove that the result under the cash
  method is substantially identical with that under
  the accrual method.
• Taxable Income Cash Method of A/C ing
• 1988 - 1,38,418
• 1989 - 1,35,958
• Accrual Method of A/C ing.
• 1988 3,31,925
• 1989 - 2,89,039

8
ISSUE - 2

• TPs sale of electrical contracting services and
  materials used for those services are not
  separable.
• So allowing TP to use both cash and accrual
  method for its electrical contracting business
  would just continue the distortion of income.

9
CONCLUSION

• The court held that
• the IRS determination is not an abuse of
  discretion
• the tp cannot use some both methods of
  accounting.