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Pursuant to section 471,5 a taxpayer that has inventories is
required to use the accrual method of accounting. An exception
to this rule exists, however, where a taxpayer can show that use
of another method (here the cash method) would produce a
substantial identity of results and that the Commissioner’s
determination requiring a change is an abuse of discretion.
Ansley-Sheppard-Burgess Co. v. Commissioner, supra at 377; see
also Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d at
791-793 (11th Cir. 1984).
By regulation, the Secretary has determined that inventories
are necessary if the production, purchase, or sale of merchandise
is an income-producing factor. Sec. 1.471-1, Income Tax Regs.
Completing the statutory and regulatory scheme, section 1.446-
1(c)(2)(i), Income Tax Regs., provides that a taxpayer that has
inventory must also use the accrual method of accounting with
regard to purchases and sales.
Although not specifically defined in the Internal Revenue
Code or regulations, courts have found that the term
"merchandise", as used in section 1.471-1, Income Tax Regs., is
5 Sec. 471 provides in pertinent part:
SEC. 471(a). General Rule.--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.
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