Gary L. Pierce - Page 15

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          further contends that, prior to 1989, Mary Catherine had not been           
          using an inventory method, and that when Mary Catherine wrote               
          down the Ridge as of yearend 1989, it was adopting a new method             
          of accounting without first securing the consent of the                     
          Secretary.  Because we hold that LCM is not a permissible method            
          of accounting for Mary Catherine, we do not reach the question of           
          whether Mary Catherine tried to change an accounting method                 
          without the consent of the Secretary.7                                      
               Section 471(a) provides:                                               
               Whenever in the opinion of the Secretary the use of                    
               inventories is necessary in order clearly to determine                 
               the income of any taxpayer, inventories shall be taken                 
               by such taxpayer on such basis as the Secretary may                    
               prescribe as conforming as nearly as may be to the best                
               accounting practice in the trade or business and as                    
               most clearly reflecting the income.                                    
          The Secretary has determined that “inventories at the beginning             
          and end of each taxable year are necessary in every case in which           
          the * * * sale of merchandise is an income-producing factor.”               
          Sec. 1.471-1, Income Tax Regs.  The term “merchandise” is not               


               7 Mary Catherine has nominally been using an inventory                 
          method since at least 1987 in that it has checked a box on each             
          income tax return indicating that it is using the LCM method of             
          determining ending inventory.  However, petitioner testified at             
          trial that Mary Catherine carefully capitalized the costs of                
          development and determined an adjusted basis of each lot sold.              
          While this is consistent with a specific identity inventory                 
          method, it is also consistent with proper capitalization of costs           
          for determination of gain under sec. 1001.  We have previously              
          rejected taxpayers’ contentions that capitalization of land and             
          building costs is an inventory method.  See, e.g., W.C. & A.N.              
          Miller Dev. Co. v. Commissioner, 81 T.C. 619, 631 (1983).                   




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