- 31 -
of-income determination (or even argument) with respect to such
drugs. But, because other cases under submission to the Court
present similar or analogous issues, and because the issue seems
to be a recurring one, a premonitory attempt to tidy up may not
be amiss.
The relevant authority is section 1.162-3, Income Tax Regs.,
“Cost of materials”, which provides as follows:
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.
The accounting authorities are in accord: This regulation
means that “Supplies in and of themselves are not considered
inventory and, thus, will not cause the taxpayer to be required
to use accrual accounting,” Bauernfeind, Income Taxation
Accounting Methods and Periods 3-4 (1991), “supplies are deferred
expenses under Reg. � 1.162-3 and not inventory under � 471”, id.
3-14, n. 61, and “when the taxpayer’s inventories are of supplies
only, use of the cash method is permitted. These items are not
Page: Previous 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 NextLast modified: May 25, 2011