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Sale of Merchandise Is an Income-Producing Factor
For merchandise to be classified as inventory under section
1.471-1, Income Tax Regs., it must also be an "income-producing
factor". Whether merchandise is an income-producing factor
depends on the facts and circumstances of the case. Thompson
Elec., Inc. v. Commissioner, T.C. Memo. 1995-292; Wilkinson-
Beane, Inc. v. Commissioner, T.C. Memo. 1969-79. If the cost of
the merchandise is substantial compared to the taxpayer's
receipts, the merchandise is an income-producing factor. Knight-
Ridder Newspapers, Inc. v. United States, 743 F.2d at 790 (11th
Cir. 1984) (the cost of newsprint and ink constituted 17.6
percent of total cash receipts); Wilkinson-Beane, Inc. v.
Commissioner, 420 F.2d at 355 (for 1963 and 1965 respectively,
the cost of caskets constituted 15.4 percent and 14.7 percent of
cash basis receipts); Thompson Elec., Inc. v. Commissioner, supra
(materials varied from 37 to 44 percent of its cash basis gross
receipts).
In this case, the facts indicate that the materials acquired
by petitioner and assigned to particular job sites, as well as
materials kept at petitioner's warehouse, were sold to its
customers as part of the subcontracting installation transaction.
The price of such materials was one of six factors making up the
price of the installation transaction; the other factors were
equipment and supply cost, labor cost, subcontractor cost, and an
overhead/profit allocation. Petitioner's materials amounted to
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