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We have concluded that the materials petitioner purchased
and the materials maintained at its warehouse were merchandise
that were an income-producing factor and that petitioner is
required to use inventories. Sec. 1.471-1, Income Tax Regs.
Furthermore, we have found that respondent did not commit an
abuse of discretion in not allowing petitioner to continue to use
the cash method of accounting. Sec. 1.446-1(c)(2)(i), Income Tax
Regs. Thus, we must now decide whether petitioner is liable for
the section 6662 accuracy-related penalty for a substantial
understatement of income for 1990.
Issue 2. Whether Petitioner Is Liable for the Section 6662
Accuracy-Related Penalty
Respondent determined that petitioner was liable for an
accuracy-related penalty pursuant to section 6662 for fiscal year
1990. Respondent asserts that the section 6662(a) penalty for
1990 is due to a substantial understatement of tax. Petitioner
asserts that it is not liable for the section 6662 penalty
because it relied on its accountant in using the cash method of
accounting.
Section 6662(a) imposes a penalty in an amount equal to 20
percent of the portion of the underpayment of tax attributable to
one or more of the items set forth in subsection (b). The
accuracy-related penalty does not apply with respect to any
portion of the underpayment if it is shown that there was
reasonable cause for such portion and that the taxpayer acted in
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