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38 percent of its COGS for 1990. Since most of the components of
petitioner's COGS are the same components that go into preparing
its estimated direct expenses, a similar relationship would, and
does, appear as direct expenses in petitioner's bid estimate.
The direct expenses plus an overhead/profit allocation of 10 to
20 percent are included in petitioner's bid price. The cost of
the materials acquired by petitioner bears a direct relationship
to the price charged for the subcontracting installation
transaction. In fact, the cost of the materials is the most
significant factor used by petitioner in computing its bid.
Thus, we find that the price charged for the subcontracting
installation transaction was directly related to the cost of the
material purchases. Wilkinson-Beane, Inc. v. Commissioner, T.C.
Memo. 1969-79. That petitioner acquired the materials from a
vendor only after it obtained a signed contract from a customer
indicates that petitioner sold the materials as part of the
subcontracting installation transaction. Cf. Honeywell Inc. v.
Commissioner, T.C. Memo. 1992-453 (fee established before
taxpayer knew the parts that would be used; thus, there was no
direct relationship between the amount charged to maintain the
computers and the cost of the parts).
Moreover, the cost of petitioner's material purchases for
the taxable year in issue represented approximately 33 percent of
its gross receipts. This amount clearly establishes that the
materials were an income-producing factor for petitioner.
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