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method and the balance of petitioner's business on the cash
method. Respondent's change to the hybrid method increased
petitioner's income by: (1) $31,887, the actual cost of the
chemotherapy drugs on hand at the end of 1995, and (2) $148,557,
the value of petitioner's accounts receivable relating to
chemotherapy drugs conveyed to patients as of the end of 1995.
Discussion
We decide for the first time whether the furnishing of
pharmaceuticals by a medical treatment facility as an integral,
indispensable, and inseparable part of the rendering of medical
services is the sale of "merchandise" for purposes of section
1.471-1, Income Tax Regs. In Hospital Corp. of Am. v.
Commissioner, 107 T.C. 116 (1996) (HCA), we held that medical
supplies and pharmaceuticals used by hospitals are so vital to
the furnishing of medical services that income earned therefrom
constitutes income earned from the performance of services for
purposes of the nonaccrual-experience method of section
448(d)(5). In HCA, we explicitly reserved for another day the
question of whether those supplies and pharmaceuticals were
merchandise that had to be inventoried under section 1.471-1,
Income Tax Regs. See id. at 143-144 n.18. That day is here in
the factual setting of a physician’s outpatient chemotherapy
treatment facility.
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