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inventories under section 471. They are not held for sale in the
ordinary course of business.” Gertzman, Federal Tax Accounting
3-55 (2d ed. 1993) (Gertzman).
The regulation says that materials and supplies cannot be
currently expensed unless four tests are met: (1) They are
“incidental”; (2) no record of consumption is kept; (3) no
physical inventories are taken at the beginning and end of the
year; and (4) income is clearly reflected. Petitioner in this
case would appear to flunk the first three tests: (1)
Chemotherapy drugs transmitted to patients in the course of
petitioner’s rendering of medical services are a substantial
portion of petitioner’s gross receipts and are a material income
producing factor, as evidenced by the markups shown in
petitioner’s billing records; and (2) and (3) records of
consumption and of supplies on hand at yearend are kept; indeed
such records seem to be required by Medicare. However, as to
(4), respondent has not made a stand-alone clear-reflection-of-
income determination, having chosen to rely solely on the
presence of merchandise requiring inventories as compelling
automatic adoption of the accrual method of accounting, the
position that we have rejected.
In other cases of service providers, such as small
contractors in the construction industry, an adjustment treating
yearend supplies as deferred expense might very well be
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