Osteopathic Medical Oncology and Hematology, P.C. - Page 1

                                   113 T.C. No. 26                                    

                               UNITED STATES TAX COURT                                

          OSTEOPATHIC MEDICAL ONCOLOGY AND HEMATOLOGY, P.C., Petitioner v.            
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 11551-98.                Filed November 22, 1999.           

                    P, a professional service corporation, specializes                
               in the treatment of cancer through chemotherapy.  P                    
               uses drugs and ancillary pharmaceuticals (collectively,                
               the drugs) during its treatment.  The chemotherapy                     
               treatments are prescribed by P’s professional staff,                   
               and patients do not select the type or quantity of                     
               drugs used during the treatments.  P uses the cash                     
               method to expense the cost of the drugs.  R determined                 
               that the drugs were "merchandise" under sec. 1.471-1,                  
               Income Tax Regs., and that P must use an accrual method                
               to report all amounts attributable to the drugs.                       
                    Held:  The inherent nature of P's business is that                
               of a service provider, P’s use of the drugs is                         
               subordinate to the provision of its services, and P                    
               uses the drugs as an indispensable and inseparable part                
               of the rendering of its services; thus, the drugs are                  
               not "merchandise" under sec. 1.471-1, Income Tax Regs.,                
               and P properly used the cash method to expense the                     
               drugs’ cost.                                                           

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