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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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