RACMP Enterprises, Inc. - Page 16




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          P.C. v. Commissioner, 113 T.C. 376 (1999).                                  
               By regulation, the Secretary has determined that                       
               inventories at the beginning and end of each taxable                   
               year are necessary in every case in which the                          
               production, purchase, or sale of merchandise is an                     
               income-producing factor.  The inventory should include                 
               all finished or partly finished goods and, in the case                 
               of raw materials and supplies, only those which have                   
               been acquired for sale or which will physically become                 
               a part of merchandise intended for sale, * * *.  [Sec.                 
               1.471-1, Income Tax Regs.; emphasis added.4]                           
               Therefore, a determination of whether the taxpayer produces,           
          purchases, or sells "merchandise" is preliminary to any                     
          determination of whether the taxpayer must account for inventory.           
          See Homes by Ayres v. Commissioner, 795 F.2d 832, 835 (9th Cir.             
          1986), affg. T.C. Memo. 1984-475.                                           
               Neither the Internal Revenue Code (the Code) nor the                   
          regulations define "merchandise" or "inventory" or clearly                  
          distinguish between "materials and supplies" that are not                   
          actually consumed and remain on hand, and inventory.  Wilkinson-            
          Beane, Inc. v. Commissioner, supra at 354 (noting "the lack of              
          any clearly pertinent definition of 'merchandise' in the relevant           
          tax sources"); Osteopathic Med. Oncology & Hematology, P.C. v.              
          Commissioner, supra at 382.  Furthermore, the differences that              
          distinguish supplies from merchandise are determined by context             



               4Completing the statutory and regulatory scheme, sec. 1.446-           
          1(c)(2)(i), Income Tax Regs., provides that a taxpayer that has             
          inventory must also use the accrual method of accounting with               
          regard to purchases and sales.                                              





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