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If the temporary and rather insignificant increase in
inventories of raw materials had been the only basis
for the Commissioner’s determination, we would have
been inclined to find an abuse of discretion. We do
not construe the Code provisions and regulations
relating to inventories in the absolute terms adopted
by the Commissioner and the Tax Court. * * *
In contrast to the facts of Knight-Ridder Newspapers, Inc.,
petitioner has no raw materials inventory; thus, there is no
fluctuation in either the absolute value or the value relative to
taxable income. Furthermore, we are unable to find as a fact
that the emulsified asphalt is merchandise. Thus, we find no
factual or legal indicators in Knight-Ridder Newspapers, Inc.
that lead us to conclude that petitioner must use an inventory
method of accounting.
Our analysis of the material at issue, and our finding that
under the facts and circumstances of this case the ephemeral
quality of the emulsified asphalt bars its inclusion in the class
of goods or commodities held for sale as "merchandise", support a
conclusion that is different from, but not contrary to, the
holdings in Wilkinson-Beane, Inc. and its progeny.
We do not interpret section 1.471-1, Income Tax Regs., to
require that if a material is an income-producing factor it must,
per se, be "merchandise". The section provides that "inventories
* * * are necessary in every case in which the production,
purchase, or sale of merchandise is an income-producing factor".
Sec. 1.471-1, Income Tax Regs. (emphasis added). Thus, we find
that the emulsified asphalt is a supply consumed in the operation
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