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merchandise is most clearly measured by matching the cost of that
merchandise with the revenue derived from its sale.”)
Even if a taxpayer need not maintain inventories, the
recovery of costs associated with the production of income may
not be governed by the taxpayer’s method of accounting. That
treatment is well known with respect to the recovery of certain
capital expenditures by way of the deduction for depreciation.
See sec. 167(a); sec. 1.446-1(a)(4)(ii), Income Tax Regs.
(“Expenditures made during the year shall be properly classified
as between capital and expense.”) More pertinent to our case is
section 1.162-3, Income Tax Regs., which addresses the cost of
materials and supplies (without distinction, supplies) that do
not constitute inventory. Unless the purchase of such supplies
constitutes a capital expenditure, section 1.162-3, Income Tax
Regs., provides:
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.
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