Tax Court Case: Jim Turin & Sons, Inc.

The commissioner of Internal Revenue appeals the Tax Court’s decision that he abused his discretion in requiring Jim Turin & Sons, Inc to use the accrual method of accounting to compute its federal taxes. The taxpayer provide paving services which involves the purchase of asphalt from a sister manufacturing corporation. The taxpayer pays for the asphalt at cost during, this price is determined during the bidding process. The asphalt must be used within several hours of shipment otherwise it will harden and become useless. The taxpayer generally receives payment on the job within 10 to 30 days of billing after the job is completed.

For the tax years at issue, the taxpayer used a cash method of accounting for federal tax purposes. Costs were deducted immediately and income is recognized when payment is received. The Commissioner determined that the asphalt was merchandise meaning the taxpayer would have inventory and need to use the accrual method of accounting. As such, the taxpayer would recognize income upon completion of the job.

They also found that the taxpayer did not have inventories and the cash method of accounting clearly reflected the appropriate income. Based on this decision, the Commissioner appealed. The Supreme Court found that the Commissioner’s decision to require a particular accounting method is a discretionary decision that should not be interfered with unless it is unlawful.

The cash method of accounting is a popular method for many small businesses. In a cash accounting method, income and expenses are recorded when the funds are received or disbursed. In accrual accounting, income is recorded when a sale is made and expenses are recorded when goods or services are received. If payment is made in advance for services to be completed in the next tax year, tax payment can be delayed until that next