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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
income.
3 Sec. 1.446-1(c)(2), Income Tax Regs., provides in part:
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