Addison Distribution, Inc. - Page 9

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            the accrual method of accounting.7  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.  The parties stipulated that AEI's                            
            sale of electronic materials was the sale of merchandise, that                               
            AEI determined its gross income from sales by subtracting COGS                               
            from total sales, and that, during the years in issue, AEI's sale                            
            of merchandise to customers was an income-producing factor.                                  
                  Possession of title to goods, even if only for an instant,                             
            is sufficient to require a taxpayer to inventory the goods as the                            
            taxpayer's stock-in-trade under the Commissioner's regulations.                              
            See, e.g., Middlebrooks v. Commissioner, T.C. Memo. 1975-275; see                            
            also sec. 1.471-1, Income Tax Regs.  Petitioners argue that AEI                              
            is not required to account for inventories because it does not                               
            take title to the merchandise.  Specifically, petitioners assert                             
            that under California law title to the electronic materials                                  
            passed directly from the vendors and subcontractors to AEI's                                 
            customers.  Petitioners, in essence, claim that AEI was a broker                             
            or agent for its customers and that AEI merely coordinated the                               
            purchase, sale, and delivery of the electronic materials to its                              

                  7  An exception to this rule exists, however, where the                                
            taxpayer can show that use of another method (e.g., the cash                                 
            method) would produce a substantial identity of results.  See                                
            Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C. 367, 377                               
            (1995).  Petitioners do not address this point in their opening                              
            or reply briefs; therefore it is not before the Court.  See                                  
            Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989).                                           

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