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"merchandise" is an income-producing factor. Without addressing
the merits of these arguments, we do not interpret section
1.471-1, Income Tax Regs., to require that if a material is an
income-producing factor it must, per se, be “merchandise”. The
section provides that “inventories * * * are necessary in every
case in which the production, purchase, or sale of merchandise is
an income-producing factor”. See sec. 1.471-1, Income Tax Regs.
Because we conclude that the chemotherapy drugs used in the
administration of the chemotherapy treatments are not
merchandise, we need not and do not reach the question of whether
merchandise is an income-producing factor in petitioner’s
business.
As mentioned above, our conclusion parallels our holding in
Hospital Corp. of Am. v. Commissioner, 107 T.C. 116 (1996), where
the hospital's professional staff frequently used pharmaceuticals
and medical supplies to provide medical care to patients.
Respondent argued in that case that the income attributable to
the pharmaceuticals and supplies could not be reported using the
nonaccrual-experience method of section 448(d)(5) because the
income was attributable to the sale of “goods”. Id. at 141.
Under that method, an accrual method taxpayer need not accrue
amounts to be received for the performance of services that, on
the basis of experience, will not be collected. See sec.
448(d)(5). The nonaccrual-experience method may not be used to
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