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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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