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nationally for chemotherapy drugs is 1.5 times the AWP, and
petitioner bills its patients for the drugs at this rate with the
expectation that the patient will pay the excess over the amount
reimbursed. With all reimbursement payments from Medicare or
private insurers, petitioner receives an "Explanation of
Benefits" that details the amounts allowed and disallowed as to
each specific charge, and the amounts for each charge which are
due from secondary insurance and/or the patient.
Petitioner has always used the cash method for purposes of
both financial and tax accounting, and it has never maintained an
inventory of any of the items used in its practice. Petitioner
expenses as supplies the cost of all chemotherapy drugs purchased
during the year; the actual cost of chemotherapy drugs which it
had on hand at the end of 1995 was $31,887. Petitioner deducted
on its 1995 tax return $772,522 in "medical supplies" for the
actual cost of the chemotherapy drugs and $66,305 in "laboratory
supplies" for the actual cost of miscellaneous nonpharmaceutical
items. Petitioner reported on its 1995 tax return $2,938,726 in
gross receipts and no cost of goods sold.
Respondent determined that petitioner had to inventory its
chemotherapy drugs, and, thus, that petitioner's use of the cash
method did not clearly reflect its income. Respondent changed
petitioner's method of accounting to a hybrid method, which
hybrid method accounted for the chemotherapy drugs on an accrual
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