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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.
3(...continued)
(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