Addison Distribution, Inc. - Page 11

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            (2d Cir. 1949), affg. a Memorandum Opinion of this Court, as                                 
            support for their contention that AEI, as a broker or agent, is                              
            not required to maintain inventories.  As we stated in Epic                                  
            Metals Corp. & Subs. v. Commissioner, supra, the U.S. Court of                               
            Appeals for the Second Circuit decided Simon on the ground that                              
            the taxpayer was properly characterized as a broker or commission                            
            merchant because his margin for profits and operating expenses                               
            was the 5-percent "commission" or "trade discount" allowed him by                            
            the manufacturers.  In the present case, as in Epic Metals, AEI                              
            does not derive its profit from commissions or trade discounts.                              
            Rather, AEI's profit is determined by the difference between the                             
            price it pays vendors or subcontractors for the electronic                                   
            materials and the price at which it sells the electronic                                     
            materials to its customers.  Thus, the facts of this case are                                
            fundamentally different from those of Simon.  See Epic Metals                                
            Corp. & Subs. v. Commissioner, supra.                                                        
                  Based on our review of the entire record, we hold that AEI                             
            had title to the electronic materials and is required to maintain                            
            inventories.  Indeed, AEI determined gross income by subtracting                             
            COGS from total sales.  We conclude that AEI is required to use                              
            the accrual method of accounting, and respondent did not commit                              
            an abuse of discretion under section 446.  See sec. 1.446-                                   
            1(c)(2)(i), Income Tax Regs.                                                                 

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