113 T.C. No. 26
UNITED STATES TAX COURT
OSTEOPATHIC MEDICAL ONCOLOGY AND HEMATOLOGY, P.C., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11551-98. Filed November 22, 1999.
P, a professional service corporation, specializes
in the treatment of cancer through chemotherapy. P
uses drugs and ancillary pharmaceuticals (collectively,
the drugs) during its treatment. The chemotherapy
treatments are prescribed by P’s professional staff,
and patients do not select the type or quantity of
drugs used during the treatments. P uses the cash
method to expense the cost of the drugs. R determined
that the drugs were "merchandise" under sec. 1.471-1,
Income Tax Regs., and that P must use an accrual method
to report all amounts attributable to the drugs.
Held: The inherent nature of P's business is that
of a service provider, P’s use of the drugs is
subordinate to the provision of its services, and P
uses the drugs as an indispensable and inseparable part
of the rendering of its services; thus, the drugs are
not "merchandise" under sec. 1.471-1, Income Tax Regs.,
and P properly used the cash method to expense the
drugs’ cost.
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