- 21 -
of petitioner's service business, not merchandise. The expense
of the asphalt is properly deducted under section 162 and the
regulations thereunder.11
Since the emulsified asphalt is not merchandise, we do not
reach the question of whether "merchandise is an income-producing
factor" in petitioner's business.
B. Inventory
In construing the word "inventory" we note that the natural
and ordinary meaning of words will be applied in construing tax
statutes unless the Congress has definitely indicated an
11 Furthermore, treating the emulsified asphalt as a
supplies expense because it is consumed in providing service to a
client is not a treatment unique to this case. For instance, the
Commissioner has issued guidance regarding expensing material
consumed in providing service to the taxpayer's customers, see,
e.g., Rev. Rul. 75-407, 1975-2 C.B. 196 (public utility should
continue to deduct the cost of fuel actually consumed and used to
generate electricity distributed during its taxable year), and
for expensing materials consumed in operation of a taxpayer's
business, see, e.g., Rev. Rul. 90-65, 1990-2 C.B. 41 (the cost of
unrecovered platinum from prills used in refining petroleum is a
material or supply expense allowed under sec. 1.162-3, Income Tax
Regs., during period prills are in use; the expense is then
required to be capitalized as provided under sec. 263A).
In addition, provided the taxpayer can verify the amount of
the expense, the Commissioner has allowed deductions for supplies
transferred to clients in the operation of taxpayer's service
business. See, e.g., Tomsykoski v. Commissioner, T.C. Memo.
1974-105 (drugs and supplies provided free of charge to
patients).
Finally, this Court has held that supplies consumed in the
provision of a service are not subject to sec. 1.471-1, Income
Tax Regs. See, e.g., Smith Leasing Co. v. Commissioner, 43 T.C.
37, 40-41 (1964) (truck leasing company allowed to charge cost of
gasoline, tires and tubes, and replacement parts directly to
expense).
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