## Facts

- Jim Turin & Sons, Inc. was a paving contractor that provided paving services.
- It purchased emulsified asphalt from a sister manufacturing corporation.
- The asphalt was shipped only hours before a paving job and had to be used within several hours or it would harden and become useless.
- Turin did not stockpile asphalt; it ordered asphalt job-by-job and used it almost immediately.
- Turin used the cash method on its returns, deducting asphalt costs when paid and recognizing job income when paid by customers (typically 10–30 days after billing).
- The Commissioner determined that emulsified asphalt was “merchandise” under Treas. Reg. § 1.471-1, requiring inventories and the accrual method, which would recognize income upon job completion rather than receipt of payment.
- The Tax Court held the Commissioner abused his discretion, finding the asphalt was not “merchandise,” that Turin had no inventories, and that the cash method clearly reflected income.

## Issues

1. Whether emulsified asphalt ordered for specific jobs and consumed within hours is “merchandise” under Treas. Reg. § 1.471-1, requiring inventories and the accrual method.
2. Whether the Commissioner abused his discretion under 26 U.S.C. § 446(b) by requiring Turin to change from the cash method to the accrual method.

## Decision

- The Ninth Circuit affirmed the Tax Court.
- Emulsified asphalt, on these facts, was not “merchandise” within Treas. Reg. § 1.471-1, so inventory accounting and the accrual method could not be compelled on that basis.
- The Commissioner abused his discretion in concluding the cash method did not clearly reflect income.

## Legal Principles

- Treas. Reg. § 1.471-1 generally requires inventories when the production, purchase, or sale of “merchandise” is an income-producing factor; materials consumed as part of providing services and not held as stock may fall outside this rule.
- A taxpayer without inventories is not necessarily subject to mandatory inventory accounting under Treas. Reg. § 1.471-1.
- Under 26 U.S.C. § 446(b), the Commissioner may require a different accounting method only if the taxpayer’s method does not clearly reflect income; that determination is reviewable for abuse of discretion.
- Where a service business uses materials ordered for specific jobs, rapidly consumed, and not maintained as carryover stock, the cash method may clearly reflect income and cannot be displaced without a showing of material distortion.

## Conclusion

The court allowed a paving contractor to continue using the cash method because emulsified asphalt ordered and consumed immediately for specific jobs was not “merchandise” requiring inventories, and the Commissioner’s attempt to force accrual accounting was an abuse of discretion where the cash method clearly reflected income.


Jim Turin & Sons, Inc. v. Comm’r, 219 F.3d 1103 (9th Cir. 2000)