Rev. Rul. 84-32

1984-1 C.B. 129, 1984-9 I.R.B. 7.

                       Internal Revenue Service
                                 Revenue Ruling

          ACCOUNTING METHODS; LONG-TERM CONTRACTS; PAINTING CONTRACTOR

                          Published: February 27, 1984

26 CFR 1.451-3: Long-term contracts

  Accounting methods; long-term contracts; painting contractor. A painting contractor who paints industrial and commercial buildings, highways and railroad bridges, and industrial plants is not entitled to use the completed contract method of accounting.

ISSUE

  Is a taxpayer who, by contract, furnishes industrial and commercial painting services qualified to use the long-term contract method of accounting under section 1.451-3(b)(1) of the Income Tax Regulations?

FACTS

  The taxpayer, a domestic corporation, is engaged in the business of providing industrial and commercial painting services.  The business consists principally of sandblasting and painting commercial and industrial buildings, highway and railroad bridges, and industrial manufacturing facilities.

  In 1982, the taxpayer entered into contracts for painting that would not be completed until the subsequent tax year.  The taxpayer elected to report its income and deductions under the long-term contract method as provided under section 1.451-3 of the regulations.

LAW AND ANALYSIS

  Section 1.451-3(a)(1) of the regulations provides that income from a long- term contract may be included in gross income in accordance with one of the two long-term contract methods, namely, the percentage of completion method or the completed contract method, or any other method if the method chosen clearly reflects income.

  Section 1.451-3(b)(1)(i) of the regulations provides that the term "long-term contract" means a building, installation, construction or manufacturing contract that is not completed within the taxable year in which it is entered into.

  The long-term contract method of accounting is only available to all taxpayers who have long-term contracts, as defined in section 1.451-3(b)(1) of the regulations.  The Internal Revenue Service has published several revenue rulings holding that an architect, an engineer, and a taxpayer providing engineering and construction management services cannot use the completed contract method of accounting.  See Rev. Rul. 70-67, 1970-1 C.B. 117, Rev. Rul. 80-18, 1980-1 C.B. 103, and Rev. Rul. 82-134, 1982-2 C.B. 88 respectively. In each of these rulings the taxpayers were not required to actually construct, build or install anything, even though their services are functionally related to activities that may be the subject of long-term contracts as defined in section 1.453(b)(1)(i) of the regulations.

  In this case the taxpayer's business activity does not require the taxpayer to construct, build, or install anything.  Rather the taxpayer only provides painting services.  In the rulings cited above, the taxpayer provided architectural, engineering, and management services.  Thus, the taxpayer in this case does not have a long-term contract as described in section 1.451- 3(b)(1)(i) of the regulations.  Its contracts are not building, installation, construction or manufacturing contracts.

HOLDING

  The taxpayer is not entitled to use the completed contract method of accounting under section 1.451-3(b)(1) of the regulations because the contract does not qualify as a long-term contract as defined in section 1.451- 3(b)(1)(i).

  The discontinuance of the use of the long-term contract method of accounting as a result of the application of this ruling

constitutes a change in method of accounting to which sections 446 and 481 of the Internal Revenue Code and the related regulations will apply.

  The use of the long-term contract method under the facts in this case constitutes the use of a Category A method of accounting as defined in section 6.02 of Rev. Proc. 80-51, 1980-2 C.B. 818, 825.

Rev. Rul. 84-32, 1984-1 C.B. 129, 1984-9 I.R.B. 7.