Ward AG Products, Inc. - Page 11

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          A taxpayer must use inventories if the production, purchase, or             
          sale of merchandise is an income-producing factor.  Sec. 1.471-1,           
          Income Tax Regs.4                                                           
               Petitioner sold seed, fertilizer, pesticides, herbicides,              
          and farm hardware.  The purchase and sale of merchandise was a              
          substantial income-producing factor for petitioner; nearly all of           
          its income was from the sale of merchandise.  See Knight-Ridder             
          Newspapers, Inc. v. United States, 743 F.2d 781, 790 (11th Cir.             

                    (2)  Special rules.  (i) In any case in which it                  
               is necessary to use an inventory the accrual method of                 
               accounting must be used with regard to purchases and                   
               sales unless otherwise authorized under subdivision                    
               (ii) of this subparagraph.                                             
                    (ii) No method of accounting will be regarded as                  
               clearly reflecting income unless all items of gross                    
               profit and deductions are treated with consistency from                
               year to year.  * * *                                                   
               4 Sec. 1.471-1, Income Tax Regs., provides in part:                    
                    Need for inventories.--In order to reflect taxable                
               income correctly, inventories at the beginning and end                 
               of each taxable year are necessary in every case in                    
               which the production, purchase, or sale of merchandise                 
               is an income-producing factor.  The inventory should                   
               include all finished or partly finished goods and, in                  
               the case of raw materials and supplies, only those                     
               which have been acquired for sale or which will                        
               physically become a part of merchandise intended for                   
               sale * * *.  Merchandise should be included in the                     
               inventory only if title thereto is vested in the                       
               taxpayer.  * * *  A purchaser should include in                        
               inventory merchandise purchased (including containers),                
               title to which has passed to him, although such                        
               merchandise is in transit or for other reasons has not                 
               been reduced to physical possession, but should not                    
               include goods ordered for future delivery, transfer of                 
               title to which has not yet been effected.  * * *                       

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Last modified: May 25, 2011