Court Opinion

ID: 4474009
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:42.400206+00
Date Added: 2024-06-11T12:48:25.191497
License: Public Domain

Gerber, J., dissenting: I respectfully disagree with the majority’s conclusions that petitioner was not selling merchandise and that respondent abused his discretion by determining that petitioner’s use of the cash method did not clearly reflect income. I disagree for the following reasons: (1) Petitioner did not meet its heavier-than-normal burden of showing an abuse of respondent’s discretion; (2) the majority’s conclusion that the materials involved are merely an inseparable part of petitioner’s performance of a service is not supported by the record; (3) the majority’s holding and approach may result in unintended preferential Federal tax treatment for a particular industry and/or taxpayers dealing in so-called ephemeral products or materials; (4) the holding in Galedrige Constr., Inc. v. Commissioner, T.C. Memo. 1997-240, is in error, and, accordingly, the majority’s reliance upon it is unfounded; and (5) this case is factually distinguishable from Osteopathic Med. Oncology & Hematology, P.C. v. Commissioner, 113 T.C. 376 (1999). The majority sets forth the correct standards for determining whether respondent has abused his discretion. Those standards are summarized here to emphasize that petitioner has failed to meet the standard expressed by the majority. The Commissioner has broad authority to decide whether a taxpayer’s accounting method clearly reflects income. We need only decide whether there is adequate basis in law for the Commissioner’s conclusion, and section 446 imposes a heavy burden on the taxpayer to show otherwise. “[A] taxpayer must establish that the Commissioner’s determination was ‘clearly unlawful’ or ‘plainly arbitrary’.” Majority op. p. 219 (quoting Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532-533 (1979)) (emphasis added). Respondent determined that “[petitioner’s] current method of accounting (cash), is an improper method and * * * changed * * * [petitioner] to an accrual method. This change has resulted in an increase in * * * [petitioner’s] gross receipts.” Respondent also determined, in the alternative, that “under the cash method of accounting, * *. * [petitioner’s] income is increased for failure to properly substantiate * * * [petitioner’s] accounts receivable.” The majority, however, limits the issue to the question of whether the material used by petitioner in performing its service contracts is the sale of “merchandise” for purposes of section 1.471-1, Income Tax Regs. Majority op. p. 218. The majority incorrectly expresses respondent’s notice determination in the following manner: “Respondent determined that the material petitioner used in its construction activity was merchandise that was income producing, and, therefore, petitioner must use the accrual method of accounting to clearly reflect its income.” Majority op. p. 220. The majority has treated respondent’s response to petitioner’s argument as respondent’s determination. Respondent’s arguments on brief were in response to petitioner’s position that it should not be placed on the accrual method because it was in a service business and because it had no inventories. The majority’s limited focus represents only a portion of the standard to be considered in order to decide this issue. Petitioner’s burden (heavier than normal) is to show that respondent’s determination is in error; i.e., that respondent abused his discretion by determining that petitioner’s method does not clearly reflect income. Petitioner cannot carry that burden by the simple expedient of contending that the materials it uses to produce finished sidewalks, driveways, and foundations should be labeled as supplies consumed. It must also show that its method of accounting clearly reflected income and that respondent’s determination was clearly unlawful or plainly arbitrary. Based on the facts of this case, petitioner has failed to carry its burden. Ultimate Factual Conclusions by the Majority1  The majority attempts to persuade us that the materials used by petitioner, which represented two-thirds of the total cost, were incidental to and absorbed in the performance of services (labor), which represented one-third of the cost. The majority focuses upon the wet concrete and unincorported materials. However, the record, when considered in its entirety, supports the conclusion that petitioner contracted to produce a finished product (sidewalks, driveways, and foundations). Equally important, petitioner has not shown the amounts of materials and/or work in progress that remained on hand at the end of the taxable period. Nor has petitioner shown that its accounting method clearly reflected income. The majority accepts petitioner’s conjectural, uncorroborated, and admittedly “self-serving” statement that there were few materials left when a job was completed. Even if that statement is correct, petitioner’s taxable period did not necessarily or likely end at the exact time petitioner’s job(s) ended. Therefore, petitioner has failed to show the amount of materials on hand at the close of the taxable year. The majority uses conjecture and draws inferences from the record to reach the conclusion that there was no inventory on hand and/or that it would not have had a material effect on petitioner’s income. Such an approach falls far short of the showing that an inventoriable amount of materials was or was not on hand at the close of its taxable year. The majority paints an image in which petitioner could be viewed as merely providing a service and consuming concrete and supplies incidental to providing that service. Although the record does confirm that petitioner is in a service-oriented business, the overwhelming weight of the evidence shows that petitioner produced a product (sidewalks, driveways, and foundations). The majority myopically focuses on the wet concrete and not on the end product that petitioner produced. Significantly, that product was completed with materials purchased by petitioner and accepted by the customer in completed form before petitioner was entitled to payment. Until such time as the customer/developer accepted the finished product, petitioner was at risk and responsible for the construction, placement, and quality of the product. Finally, it is significant that petitioner’s profit percentage (about 15 percent) was marked up on both materials (including concrete) and labor. The majority also attempts to minimize the possible effect on petitioner’s income of the purchase and storage of sand, gravel, rebar, anchor bolts and rods, expansion anchors, holddowns, straps, and piping for sewer and drainage (other materials) used in producing the final product (sidewalks, driveways, and foundations). It is my understanding of the facts that only concrete suppliers were involved in asserting their liens and were paid by a separate check from the developer through petitioner in order to ensure that any suppliers’ liens were satisfied. Even if a separate check was issued by the developer to petitioner and the supplier jointly, petitioner had the contractual relationship with all suppliers and claimed the concrete and all other materials as cost of goods sold. In either event, there is no specific evidence that the suppliers of sand, gravel, rebar, anchor bolts and rods, expansion anchors, holddowns, straps, and piping for sewer and drainage were paid by a separate check from the developer. To the contrary, sand and gravel were ordered periodically and delivered to the job site and used over a period of time. The record also confirms that rebar, anchor bolts and rods," expansion anchors, holddowns, straps, and piping for sewer and drainage were periodically ordered in bulk and taken as needed from a standing supply that was maintained in a large metal storage container at petitioner’s place of business and transported to job sites on a regular basis. Petitioner did not show the amount of sand and gravel at job locations as of the end of the taxable period. Nor did petitioner show the amount of other materials stored in the metal container or at the job site as of the end of the taxable period. In addition, petitioner had work in progress (finished concrete structures) for which components were deducted, but the final payment may not have been received. Again, petitioner made no showing of the amount or status of paid-for materials contained in work in progress at the close of its taxable year. The majority also attempts to show that the amount of sand and gravel and other materials on hand at the end of the taxable year was de minimis by surmising that the percentage cost of those items reflected in the final product was smaller than the percentage of labor or concrete. But that in no way shows the amount that petitioner may have had on hand at the end of the taxable period. The invoices for the sand and gravel and other materials show periodic purchases in the tens of thousands of dollars. Accordingly, sufficiently large quantities of these items may have been on hand at any particular time, including the end of the taxable year. Petitioner was constructing foundations, sidewalks, and driveways in large subdivisions, so it is likely that at any particular time petitioner maintained a relatively large quantity of sand and gravel at the job site. Petitioner has provided no specific evidence as to the amount of these items on hand or that they were, in fact, without a significant effect on the amount of income that would have been reported under the accrual method. The majority accepts, without any corroboration, testimony that the amount of sand and gravel on hand was small. Petitioner, however, kept no records of the inventory of sand, gravel, and other materials on hand and was not able to show the amount of materials on hand. Considering the heavy burden imposed here, a taxpayer should not be able to show that the Commissioner’s determination was arbitrary by the simple expedient of stating that any difference in accounting method is “small”. Petitioner paid the suppliers for these items, and accordingly they were contained in petitioner’s “cost of goods sold” shown on the return. It should also be noted that petitioner included the cost of the concrete in its cost of goods sold and that hardened concrete existed in the form of work in progress. In that regard, petitioner did not show that amounts claimed in cost of goods sold did not represent poured/hardened concrete for which the profit/income had not yet been received/reported. It must also be emphasized that petitioner decided which concrete supplier to use and had contractual relationships with particular suppliers. It was petitioner who placed orders and accepted delivery of the concrete at the job site. Although the developer’s agent was occasionally on the job site for inspection of the concrete, petitioner bore the risk of loss from a substandard or misplaced concrete- order. Petitioner had the right under its contract with the concrete supplier to refuse delivery of substandard concrete, and, under normal conditions, it was petitioner who was present at and controlled the pouring of concrete into the forms. Finally, petitioner took possession of the concrete at the time it was being poured and likely held title to the concrete under California law. The majority labels petitioner’s contractual relationship with the developer as one for services, but that same contract contains the specifications for the final product that petitioner was obligated to produce. Other portions of the contract set forth the materials that petitioner must provide and include in the finished product. It is important to note that we are not presented with a situation where the developer purchases materials and the contractor simply provides labor and incidental supplies; i.e., a contractor who is hired solely to supervise the pour and/or finish the concrete. The contract and other facts in the record reflect an agreement for the delivery of a finished product. The total cost of the product, two-thirds of which was composed of materials, was marked up with a 15-percent profit. Finally, the developer could reject the finished product, and petitioner would have to bear the cost of removing the solidified concrete, which includes the rebar, bolts, and other materials (“hardware items”). Based on the record, I reach the ultimate conclusion that petitioner was engaged in producing and selling sidewalks, driveways, and foundations. Petitioner did not merely provide a service and consume the concrete, sand, rebar, bolts, plates, pipes, etc., in providing the service. To so find would stretch the majority’s analogy to architects and blueprint ink “to infinity and beyond.” Finally, the value of the materials used far outweighed the value of the services by a 2-to-l ratio (66 percent materials vs. 34 percent labor). At the close of petitioner’s taxable year, it had on hand materials that had been paid for and were accordingly included in cost of goods sold in the form of: “Hardware” (rebar, anchor bolts and rods, expansion anchors, holddowns, straps, and piping for sewer and drainage); sand and gravel in place at existing job sites; and work in progress (including finished sidewalks, driveways, and foundations composed of purchased materials, which had not been accepted by the developer/customer and, accordingly, for which income was not reported). All of those items may have had a significant effect on petitioner’s reportable taxable income. Again, petitioner has not shown the amount of materials on hand or work in progress as of the end of the taxable year under consideration.2  Petitioner, at the end of its very first year in existence, had accounts receivable of $294,436 on accrual method gross receipts of $1,798,338; i.e., 16.4 percent of its receipts were unreported at the end of its taxable year. Moreover, the accounts receivable of $294,436 was 18.8 percent of the reported gross receipts, under the cash method, of $1,564,045. If the taxable income reported by petitioner included the receivables under the accrual method of accounting, petitioner would have reported taxable income of $267,428. Petitioner claimed cost of goods sold in the amount of $993,777, which resulted in taxable income on the cash method of $64,806. Any reduction in cost of goods sold, of course, would increase income. In spite of these disparities, the majority did not address the question of substantial identity of results. See majority op. p. 233. Petitioner’s failure to show that any of the above-discussed factors or items would not have made a difference in petitioner’s cost of goods sold or income, ultimately, should result in our holding that petitioner failed to show that respondent abused his discretion in determining that petitioner’s use of the cash method did not clearly reflect income. In the vernacular used by the majority, petitioner has not shown that respondent’s determination was "plainly arbitrary”.3 Majority op. p. 219. I next consider whether petitioner has shown that respondent’s determination was “clearly unlawful”. Id. Legal Discussion The majority’s legal discussion is broken into two major categories involving whether the sidewalks, driveways, and foundations were merchandise and whether respondent abused his discretion. Each is separately addressed. (1) Whether the Materials Used or the Structures Constructed by Petitioner Were Merchandise Normally, in cases where respondent determines that a taxpayer’s accounting method should be changed to the accrual method, the controversy concerns whether the merchandise is a material income-producing factor and whether the accrual or cash method of accounting more clearly reflects income. Respondent has determined that petitioner should use the accrual method, and, accordingly, petitioner must show that there has been an abuse of discretion by addressing the above-referenced factors. Petitioner, relying on Galedrige Constr., Inc. v. Commissioner, T.C. Memo. 1997-240, attempts to lessen its burden by attempting to show that the materials used and the objects constructed are not merchandise and are instead supplies consumed in performing a service. Following petitioner’s lead, the majority holds that neither the materials nor the constructed products constitute merchandise. In support of the holding that the materials used and the products completed by petitioner are not merchandise, the majority relies on the following: (a) Petitioner is primarily a service provider (a fact that is not supported by the record when viewed as a whole); (b) there is no established definition for the terms “inventory” or “merchandise”; (c) in order for items to be “merchandise” they must be goods held for sale; (d) case law holds that, per se, construction contracts are contracts for the provision of services as opposed to the sale of goods; (e) liquid concrete cannot be merchandise because it hardens in a short period of time; i.e., it is ephemeral in nature and must, therefore, be consumed in the performance of a service; (f) the sand, gravel, rebar, anchor bolts and rods, expansion anchors, holddowns, straps, and piping for sewer and drainage lose their separate identity, become part of the hardened concrete, and are thus “indispensable and inseparable from the service provided by the taxpayer”, majority op. p. 227; (g) driveways and walkways are improvements to real property and, ipso facto, cannot be merchandise. Because of the majority’s conclusion that the materials that went into the product (sidewalks, driveways, and foundations) were not merchandise, the majority does not discuss whether they were material income-producing factors. A full and complete analysis of the record does not support the majority’s ultimate finding of fact that the materials and products were merely supplies consumed in petitioner’s performance of a service for customers. Likewise, an analysis of established precedent of this Court leads to the conclusion that petitioner has not carried its burden of showing: That the materials and/or finished product were not material income-producing factors; that the cash method of accounting more clearly reflects income; and, ultimately, that respondent abused his discretion by determining that petitioner should change to the accrual method. (a) Petitioner’s Business Is Not Primarily Providing a Service— To be sure, petitioner is engaged in a labor-intensive activity. Generally, the construction industry is considered to be service oriented. Most businesses, however, have some element of labor or service and some element of merchandise or product.4 See, e.g., Thompson Elec., Inc. v. Commissioner, T.C. Memo. 1995-292, where the taxpayer, an electrical contractor, used materials such as wiring, conduits, electrical panels, and lighting fixtures in its contracting business. The question that must be considered is: “At what point do the materials become an income-producing factor?” The taxpayer in Thompson Elec., Inc., maintained on its premises an inventory of unassigned materials that were used for small contracts and, in addition, delivered materials directly from the supplier to its large-contract customers’ sites. In Thompson Elec., Inc., it was held that those materials were merchandise that was an income-producing factor even though: The taxpayer did not display the material to customers or to the public, the material was not itemized on bids or invoices nor separately charged to the customer, the taxpayer did not sell material separately from its services, and the taxpayer’s customers generally did not select the materials to be used. As in Thompson Elec., Inc., petitioner is a contractor but is in the business of constructing concrete sidewalks, driveways, and related structures. Petitioner makes bids and then contracts with developers to construct a finished structure or product. Petitioner purchases concrete, sand, gravel, rebar, anchor bolts and rods, expansion anchors, holddowns, straps, and piping for sewer and drainage and uses those materials to produce sidewalks, driveways, and foundations. The developer, who does not have any contractual relationship with the suppliers of concrete, sand, gravel, and other materials, must accept the finished product before petitioner is entitled to payment. The materials represent approximately two-thirds of the cost of the finished product and the labor approximately one-third. Petitioner is financially responsible for any deficiencies in the contract specifications up until the acceptance of the finished product by the developer. At any particular time, petitioner has on hand sand, gravel, rebar, anchor bolts and rods, expansion anchors, holddowns, straps, and piping for sewer and drainage stored at various sites, including its place of business. When all of these facts are taken into consideration, it becomes evident that petitioner is not solely engaged in providing labor and that the materials are not merely consumed in providing a service. If, however, petitioner had contracted to set forms, pour and finish concrete for a developer who purchased the sand, gravel, concrete, rebar, anchor bolts and rods, expansion anchors, holddowns, straps, and piping for sewer and drainage, the majority’s finding or holding would then ring truer. Instead, the facts in this case are difficult to distinguish from those set forth in Thompson Elec., Inc. (b) The Majority’s Use of the Terms “Merchandise”, “Inventory”, and “Goods Held for Safe” — Although the terms “merchandise” and “inventory” are not specifically defined in the tax law, it is fair to say that those terms are broadly used in the pertinent statutes and regulations. Petitioner’s contractual relationships involve large residential construction projects, and, at any particular time, petitioner has work in progress (including placed sand, gravel, rebar, anchor bolts and rods, expansion anchors, holddowns, straps, piping for sewer and drainage, and finished sidewalks, driveways, and foundations that the developer has not yet accepted). Petitioner also purchases materials that remain on hand and in place at the end of its taxable year. I disagree with the majority’s holding based on petitioner’s uncorroborated statements and argument that there was no inventory on hand or that it was not producing merchandise. The majority also makes a distinction that is at odds with existing case law by holding that merchandise/inventory must be “property that is held for sale, not simply property that is sold.” Majority op. p. 222. Implicit in the majority’s statement is that goods do not become merchandise or inventory if they are not “held” for some period of time. The only difference one might glean from the majority’s distinction is that the purchased items must be “held” for some period of time for sale to customers. That statement is contrary to existing case law. It is well established that the length of time the goods are held does not have a bearing on whether they are merchandise/inventory. Even if the taxpayer possessed title to the goods for an instant, it is sufficient to require a taxpayer to inventory the goods as the stock in trade. See Addison Distrib., Inc. v. Commissioner, T.C. Memo. 1998-289; Middlebrooks v. Commissioner, T.C. Memo. 1975-275. In Addison Distrib., Inc., the taxpayer had electronic materials for a very short period (for inspection purposes), and then it forwarded the materials to the customer. In Addison Distrib., Inc., it was held that the taxpayer should be required to account for inventory and be on the accrual method even though it appeared unlikely that there would be any inventory on hand at the end of an accounting period. In another case involving a taxpayer in the construction industry, it was held that inventories were required, and the accrual method should be used even though the materials were shipped directly to job sites, and no substantial amounts of materials were inventoried at the taxpayer’s warehouse. See Tebarco Mechanical Corp. v. Commissioner, T.C. Memo. 1997-311 (involving a plumbing, heating, and air-conditioning contractor who was generally involved in commercial construction projects). Considering the above-cited cases, it is hard to understand the majority’s point or distinction in emphasizing that inventory and/or merchandise must be held for sale in addition to being merely sold. There is no question here that petitioner contracted to purchase the concrete, sand, gravel, concrete, rebar, anchor bolts and rods, expansion anchors, holddowns, straps, and piping for sewer and drainage. Some of those items were inventoried at petitioner’s place of business, some were stored at the customer’s job site (sand and gravel). The concrete, however, was ordered by petitioner in a contract relationship between petitioner and a supplier. Petitioner controlled the ordering of the concrete and its time of delivery, pouring, and placement. Finally, although the concrete hardened in place, petitioner remained responsible for any risk of loss until the developer/customer accepted the finished product. By way of analogy, some contractors precast and sell large concrete structures that are transported from the contractors’ place of business to the buyers’ job sites. Would the majority hold that such a precast product is not merchandise? Should the place of casting the concrete dictate a taxpayer’s choice of accounting method? In either case, the contractor is purchasing the materials, casting the concrete shape (incorporating the so-called hardware), then marking up the material and labor, and selling it to the end user. Should there be a difference between contractors who provide electrical, plumbing, heating, air conditioning services and/or materials and those who provide other structural components (e.g., concrete)? The majority cites several nontax cases for the proposition that construction contracts are, per se, contracts for labor and not contracts for the sale of goods. Considering Thompson Elec., Inc. v. Commissioner, T.C. Memo. 1995-292, Tebarco Mechanical Corp. v. Commissioner, supra, and related cases, it has made no difference for Federal income tax purposes that the taxpayers were involved in construction or a service-oriented business. The more important question (which the majority has not addressed) is whether the items here were income-producing factors. Indeed, the answer to the question of whether taxpayers should maintain inventories and be placed on the accrual method of accounting should not be different depending upon which industry we are considering. It must be noted that two-thirds of petitioner’s profit in this business are attributable to the materials and only one-third to services or labor. We consider these factual issues on an ad hoc basis. If, as a matter of tax law, particular taxpayers fall within the ambit of a regulation requiring the use of the inventory method and/or the accrual method of accounting, they should not be exempted because of State case or statutory law, especially if other similarly situated Federal taxpayers must otherwise comply with the same rules under the same circumstances. To the extent that the majority relies on cases that hold that an accretion to real property is not the sale of goods, those holdings should be given no more credibility than contract case law. After all, on numerous occasions this Court has been confronted with the question of whether realty was held for sale or investment. If real property is held primarily for sale in the ordinary course of a trade or business, gain from its sale is ordinary income as opposed to capital gain. See Eline Realty Co. v. Commissioner, 35 T.C. 1 (1960); Phillips v. Commissioner, 24 T.C. 435 (1955). In other words, taxpayers have been found to be in the business of selling houses. The costs of materials used in the construction of houses are not deductible expenses, but rather they are included in the basis of the home and give rise to ordinary income or capital gain upon sale. The present situation is analogous and should be accounted for in the same manner; i.e., petitioner should not be allowed to deduct expenses prior to reporting income. Thus, while it is true that real property is not considered merchandise or inventoriable in the same sense that personal property is, the method of accounting for the sale of real property, by way of analogy, reflects that the material and products remaining on hand or contained in work in progress should be considered inventory and/or their costs subtracted from petitioner’s cost of goods sold. Finally, the majority cites Levine v. State Bd. of Equalization, 299 P.2d 738 (Cal. App. 2d 1956), a sales tax case, to support its holding/finding that petitioner is a service business and the materials that go into making concrete structures are not merchandise. Although it is irrelevant to the question of Federal taxation, petitioner passed on the charges for sales tax on all materials that were used in making the walkways and driveways. No sales tax was charged on the labor. The costs of the product sold included about two-thirds materials and one-third labor. More importantly, we cannot consider the Federal laws as being subservient to or dependent upon State sales tax statutes. That would likely cause differing results depending on the sales tax law and rulings in each State. Although we might look to State law to determine the ownership of property, we must apply the Federal tax statutes uniformly in accord with our mandate. (c) Galedrige Constr., Inc. v. Commissioner, T.C. Memo. 1997—240, Should Not Be Applied in This Case and Is Incorrect as a Matter of Law — Galedrige Constr., Inc., is relied on by petitioner and is foundational to the majority’s conclusion that liquid concrete is “the only form of the material that provided any value to * * * [petitioner, and it is] ‘used up’ or consumed in providing service to * * * [petitioner’s] client.” Majority op. p. 226. From that premise, the majority reaches the ultimate conclusion that the material has been consumed in the performance of a service and that it is a supply and not merchandise held for sale.5 Assuming, arguendo, that Galedrige Constr., Inc., is correct as a matter of law, it should not be applied in the setting of this case. Here again, the focus of the majority is too limited. If petitioner had been hired merely to provide the service of overseeing the pouring of liquid concrete and/or finishing semi-hardened concrete, the majority’s conclusion would have a more rational and sounder basis. Those, however, are not the facts of this case. As more fully explained, supra, petitioner entered into a contract to construct sidewalks, driveways, and foundations to certain specifications. At the end of petitioner’s performance of labor (which represents about 34 percent of the total costs) the materials had not been “consumed” or “used up”. Indeed, the materials had been constructed into the very item (product) that petitioner contracted to construct. At that point, legal principles may hold that the sidewalks or driveways then belonged to the owner of the real property, but they most certainly had not been consumed or used up in the performance of a service. The holding in Galedrige Constr., Inc., is not in accord with established case precedent. That holding is that “the ephemeral quality of the emulsified asphalt bars its inclusion in the class of goods or commodities held for sale as ‘merchandise’”. The Galedrige Constr., Inc., holding is premised on the fact that something that will lose value in a short time or will be difficult to “inventory” cannot be merchandise or inventory. No other reasoning is offered or appears obvious for such a holding, and no prior case discussed this premise. That holding appears to be in conflict with the Court of Appeals for the Eleventh Circuit’s holding in Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781 (11th Cir. 1984). In that case, the court held that, even though the taxpayer sold an extremely perishable commodity and had no inventory of finished goods, the taxpayer was required to account for inventories because newspapers were merchandise, and there was a significant fluctuation of newsprint and ink on hand. By way of comparison, a morning newspaper will be stale later the same day. How does the majority distinguish between concrete that hardens and news that becomes stale? The hardened concrete, if not formed, and the old newspaper both lose substantial value. Petitioner, however, ordered no more concrete than it needed or could use in a particular period of time, and the incidence of wasted or unused and hardened concrete was not a financial factor or risk in petitioner’s business. To the contrary, after the concrete was poured, petitioner had created a valuable product for which it would receive payment. In addition, the lack of inventory on hand has already been held not to be determinative of the question of whether merchandise is an income-producing factor for the application of the accrual method. See, e.g., J.P. Sheahan Associates, Inc. v. Commissioner, T.C. Memo. 1992-239. Also, the fact that merchandise may only briefly be in the possession of the seller is of no consequence. See, e.g., Addison Distrib., Inc. v. Commissioner, T.C. Memo. 1998-289. The conclusion that a product with a limited commercial life cannot be merchandise defies reason. In Asphalt Prods. Co. v. Commissioner, 796 F.2d 843 (6th Cir. 1986), affg. on this issue, revg. in part, and remanding Akers v. Commissioner, T.C. Memo. 1984-208, revd. on another issue 482 U.S. 117 (1987), it was held that a seller of asphalt to contractors like the one in Galedrige Constr., Inc., should be on the accrual method because it held merchandise/inventory to be for sale. Is the asphalt or concrete less ephemeral for the person who supplies it? If a supplier of asphalt or concrete also contracted to pour and place it for customers, would it have to use differing methods of accounting for each activity? If taxpayers sell products that spoil easily, should those taxpayers be exempt from the section 471 or section 446 requirements if they otherwise fall within the statute’s reach? The answer to these questions should be “no”, and the Galedrige holding is in error. (d) Osteopathic Med. Oncology & Hematology, P.C. v. Commissioner, 113 T.C. 376 (1999), Is Factually Distinguishable From the Circumstances in This Case — Osteopathic Med. Oncology & Hematology, P.C., was a Court-reviewed opinion in which 10 of 16 participating Judges joined in the majority’s findings and holding, and 4 of 16 joined in the dissent specifically disagreeing with the majority’s findings and holding. Of the remaining two Judges, one dissented without comment and one concurred in the result but did not join the majority. To be sure, the majority’s opinion in Osteopathic Med. Oncology & Hematology, P.C., is the view of this Court, but it is substantially a factual finding that the drugs in that case were a supply consumed in the performance of a service and that the drugs were not merchandise.6 In any event, the case before us now does not involve a medical practice, the administration of drugs, or hybrid accounting methods. The facts we consider here involve the use of relatively substantial amounts of materials to construct finished products. The question of whether an accounting method clearly reflects income is a factual question that is decided on a case-by-case basis. See Hamilton Indus., Inc. v. Commissioner, 97 T.C. 120, 128-129 (1991). Without detailing all of the findings in Osteopathic Med. Oncology & Hematology, P.C., it should suffice to understand that the chemotherapy drugs were consumed in the patients’ bodies. The physicians were treating patients’ illnesses by administering drugs into the patients’ bodies. Although there was disagreement about whether the drugs were merchandise or a supply, Osteopathic Med. Oncology & Hematology, P.C., presents a situation where the conclusion that the drugs are consumed in the performance of a service is easier to make. Clearly, no product resulted from the administration of drugs into patient’s bodies. The purchase of materials and construction of them into finished products in this case is not easily transformed into being “an indispensable and inseparable part” of a service. Majority op. p. 225. As already explained in this dissenting opinion, petitioner purchased materials and sold them to customers in the form of a finished product. The very reasons for finding the drugs to be supplies consumed in performing a service in Osteopathic Med. Oncology & Hematology, P.C. are the antithesis of the circumstances presented in this case where finished products result from petitioner’s labors. (2) Whether Respondent Abused His Discretion Finally, the majority in this case finds irrelevant the fact that petitioner had accounts receivable of $294,436 for its very first year, in which it reported $64,806 of taxable income under the cash method. The majority relies on section 448 for its conclusion that petitioner’s failure to meet the substantial-identity-of-results test is irrelevant because that section allows certain taxpayers to use the cash method and/ or not maintain inventories. The majority also finds significant the holding in Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C. 367, 377 (1995). Section 448 permits certain smaller businesses to use the cash method, but it does not preclude the Commissioner from determining, as was done here, that a taxpayer’s method does not clearly reflect income. Section 448 was argued by petitioner on brief to the extent that petitioner contended that it was within the $5 million maximum limitation of that section. Respondent made no comments in his brief concerning section 448 but instead relied on the argument that petitioner failed to show that its method (cash) clearly reflected income; i.e. that respondent abused his discretion. Respondent’s discretion to determine that petitioner’s method does not clearly reflect income is derived from section 446 and is not obviated by section 448. Although section 448 may enable smaller businesses to use the cash method, it also effectively abolishes the use of the cash method for all other taxpayers.7 Where a taxpayer is qualified under section 448,8 the cash method may be used if the taxpayer can show that the cash method more clearly reflects income. Section 448 cannot be treated as a complete answer to our inquiry. To do so would ignore the statute, regulations, and our case precedent that hold that taxpayers may be required to use the inventory and/or accrual method even though they do not have goods on hand. To use the lack of inventory on hand as a reason to hold that respondent has abused his discretion is, likewise, not appropriate.9 Although the opinion in Ansley-Sheppard-Burgess Co. v. Commissioner, supra, focused on section 448, the parties in that case stipulated that the taxpayer did not maintain an inventory and met the requirement of section 448(b)(3). In this case, no such agreement exists. In this case, petitioner is not exempted from showing that the cash method clearly reflected its income by any of the expedients relied upon by the majority. Moreover, petitioner has not shown that respondent’s determination was plainly arbitrary. The use of Osteopathic Med. Oncology & Hematology, P.C. v. Commissioner, supra, as a pervasive rule that income from services, by definition, cannot involve the sale of goods or merchandise would be unsound.10 The majority’s holding here would have the effect of overruling numerous cases, including several involving similarly situated taxpayers engaged in the construction industry. The effect of the majority’s holding is to exempt contractors in the construction industry from sections 446 and 471 if the materials they purchase/sell are used in constructing part of an addition to real estate. The majority’s approach would confer preferential treatment on a limited class of taxpayers without congressional mandate. Cohen, Ruwe, Halpern, and Thornton, JJ., agree with this dissenting opinion.   As the trial Judge (finder of fact) in a factually oriented case, I am placed in the difficult and unpleasant position of providing, in the context of a dissenting opinion, my factual perspective. Two critical factual inquiries are presented by the issues: (1) Whether petitioner has shown that respondent abused his discretion, and (2) whether petitioner produced or sold merchandise and/or had ending inventory. I disagree with the majority’s ultimate findings of fact, and, to some degree, the standard employed. Each of these matters is separately addressed in this dissent.    The existence of $294,436 in accounts receivable at the end of petitioner’s very first taxable year may indicate that petitioner had a substantial amount of completed work and work in progress for which it had not been paid, but for which it had deducted the cost of materials. Under the cash method, the accounts receivable and work in progress for which payment has not been received are not included in gross receipts. A mismatch thus occurs by the overstatement of deductions for materials under the cash method. In this case, the mismatch is potentially large considering that the accounts receivable represent a large percentage of the gross receipts for the tax year under consideration.    Even if the facts equally supported both parties’ positions, petitioner necessarily fails to meet the heavy burden imposed.    The majority contends that the substantiality of the materials or product is irrelevant to the question of whether or not such items are merchandise. At least two cases, however, have given weight to the proportion of such items to service. See 'Wilkinson-Beane, Inc. v. Commissioner, 420 F.2d 352, 355 (1st Cir. 1970), affg. T.C. Memo. 1969-79; Thompson Elec., Inc. v. Commissioner, T.C. Memo. 1995-292.    For purposes of comparison, the parties in this case stipulated that the lumber that was used to construct the forms and was removed from the final product and sometimes reused was a supply and not merchandise. We note that the lumber constituted approximately 1 percent of the cost of the materials.    See, however, Judge Halpern’s dissenting opinion indicating that the majority’s conclusion may constitute a rule of law as it relates to businesses involved in medical practices. Osteopathic Med. Oncology & Hematology, P.C. v. Commissioner, 113 T.C. 376, 402 (1999) (Halpern, J., dissenting).    Congress’ enactment of sec. 448, in part, reflects its acceptance that the cash method results in mismatching, but it did not make its use by small taxpayers into a safe haven from the exercise of the Commissioner’s discretion under sec. 446. .    There has been no showing here that petitioner is in all respects qualified under sec. 448. In addition, the parties did not stipulate that petitioner was qualified under sec. 448.    That reasoning is further weakened by petitioner’s failure to show that no materials were on hand at the close of its taxable year.    For example, at the other end of the spectrum, a service (as opposed to self-service) grocery store provides many services for its customers in connection with the sale of its merchandise.