Ward AG Products, Inc. - Page 10

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                                    II.  OPINION                                      
          A.   Contentions of the Parties and Background                              
               Respondent determined and contends that petitioner must use            
          the accrual method of accounting for its taxable years ending               
          October 31, 1990, 1991, and 1992.  Respondent contends that                 
          petitioner must use inventories because petitioner's purchase and           
          sale of merchandise is an income-producing factor.                          
               Petitioner contends that its inventories are de minimis and            
          contends that it qualifies under section 448(b)(1), which permits           
          farmers to use cash accounting.                                             
          B.   Whether Petitioner's Purchase and Sale of Merchandise Was an           
               Income-Producing Factor                                                
               Respondent contends that the purchase and sale of                      
          merchandise was a substantial income-producing factor for                   
          petitioner.  We agree.                                                      
               A taxpayer generally must use the accrual method of                    
          accounting with regard to purchases and sales if it must use                
          inventories.  Sec. 471;2 sec. 1.446-1(c)(2)(i), Income Tax Regs.3           

               2 Sec. 471 provides in pertinent part:                                 
               SEC. 471(a).  General Rule.--Whenever in the opinion of                
               the Secretary the use of inventories is necessary in                   
               order clearly to determine the income of any taxpayer,                 
               inventories shall be taken by such taxpayer on such                    
               basis as the Secretary may prescribe as conforming as                  
               nearly as may be to the best accounting practice in the                
               trade or business and as most clearly reflecting the                   
               3 Sec. 1.446-1(c)(2), Income Tax Regs., provides in part:              

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