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Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C. 367 (1995);
see also Wal-Mart Stores, Inc. & Subs. v. Commissioner, supra.
We focus our inquiry on whether the chemotherapy drugs were
supplies deductible under section 162, or merchandise that must
be inventoried under section 471. Section 162(a) allows a
deduction for “all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business”. The relevant regulations explain that
Taxpayers carrying materials and supplies on hand
should include in expenses the charges for materials
and supplies only in the amount that they are actually
consumed and used in operation during the taxable year
for which the return is made, provided that the costs
of such materials and supplies have not been deducted
in determining the net income or loss or taxable income
for any previous year. If a taxpayer carries
incidental materials or supplies on hand for which no
record of consumption is kept or of which physical
inventories at the beginning and end of the year are
not taken, it will be permissible for the taxpayer to
include in his expenses and to deduct from gross income
the total cost of such supplies and materials as were
purchased during the taxable year for which the return
is made, provided the taxable income is clearly
reflected by this method. [Sec. 1.162-3, Income Tax
Regs.]
Section 471 provides in pertinent part:
SEC. 471. GENERAL RULE FOR INVENTORIES.
(a) General Rule.--Whenever in the opinion of the
Secretary the use of inventories is necessary in order
clearly to determine the income of any taxpayer,
inventories shall be taken by such taxpayer on such
basis as the Secretary may prescribe as conforming as
nearly as may be to the best accounting practice in the
trade or business and as most clearly reflecting the
income.
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