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Regs.,23 is not limited to goods held for sale to retail
customers, or even just to sale transactions, but is broad enough
to capture every transaction in which petitioners' hospitals use
a medical supply in treating a patient. Respondent maintains
that medical supplies are considered to be merchandise in the
business of the respective manufacturers, wholesalers, and
retailers which manufacture, distribute, and sell the medical
supplies; that the medical supplies continue to be merchandise
23
Sec. 1.471-1, Income Tax Regs., provides in part as follows:
� 1.471-1 Need for inventories.
In order to reflect taxable income correctly,
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, in which class fall containers, such as kegs,
bottles, and cases, whether returnable or not, if title
thereto will pass to the purchaser of the product to be sold
therein. Merchandise should be included in the inventory
only if title thereto is vested in the taxpayer.
Accordingly, the seller should include in his inventory
goods under contract for sale but not yet segregated and
applied to the contract and goods out upon consignment, but
should exclude from inventory goods sold (including
containers), title to which has passed to the purchaser. A
purchaser should include in inventory merchandise purchased
(including containers), title to which has passed to him,
although such merchandise is in transit or for other reasons
has not been reduced to physical possession, but should not
include goods ordered for future delivery, transfer of title
to which has not yet been effected.
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