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Knight-Ridder Newspapers, Inc. v. United States, supra (sale of
newspapers was a material income-producing factor where the cost
of raw materials for such newspapers was 17.6 percent of total
revenues); Wilkinson-Beane, Inc. v. Commissioner, 420 F.2d at 355
(for 1963 and 1965, the cost of caskets constituting 15.4 percent
and 14.7 percent, respectively of the taxpayer's cash basis
receipts was a substantial income-producing factor).
Since petitioner's materials are both merchandise and an
income-producing factor, section 1.471-1, Income Tax Reg., is
applicable. Respondent determined, pursuant to section 1.446-
1(c)(2)(i), Income Tax Regs.,8 that this conclusion requires
petitioner to use the accrual method of accounting. Petitioner
argues that section 1.446-1(c)(2)(ii), Income Tax Regs., allows
respondent to authorize petitioner's use of the cash method,
8 Sec. 1.446-1(c)(2), Income Tax Regs., provides:
(2) Special rules. (i) In any case in which it is necessary
to use an inventory the accrual method of accounting must be
used with regard to purchases and sales unless otherwise
authorized under subdivision (ii) of this subparagraph.
(ii) * * * The Commissioner may authorize a taxpayer to
adopt or change to a method of accounting permitted by this
chapter although the method is not specifically described in
this part if, in the opinion of the Commissioner, income
is clearly reflected by the use of such method. Further,
the Commissioner may authorize a taxpayer to continue the
use of a method of accounting consistently used by the
taxpayer, even though not specifically authorized by the
regulations in this part, if, in the opinion of the
Commissioner, income is clearly reflected by the use of such
method. * * *
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