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Section 1.162-3, Income Tax Regs., provides for the deferred
expense treatment of nonincidental supplies without regard to the
taxpayer’s overall method of accounting.
IV. Discussion
A. Purchases and Sales of Inventory
1. Respondent’s Pleading
Petitioner expended $772,522 for chemotherapy drugs during
1995 and treated that expenditure as an expenditure for
incidental supplies. That was plain error under section 1.162-3,
Income Tax Regs. See concurring opinion of Judge Beghe at 32.
Respondent treated the expenditure as if it constituted the cost
of goods purchased for resale. On the facts of this case, in
terms of accounting for the cost of the chemotherapy drugs, it
makes no difference whether the $772,522 expended for
chemotherapy drugs is treated as the cost of goods held for
resale or as a deferred expense.4
The only issue open to debate is whether respondent can
compel petitioner to account for amounts billed to Medicare (and
to patients) under an accrual method. Although section 1.446-
1(c)(2)(ii), Income Tax Regs., leaves no doubt that the Secretary
can so compel petitioner if purchases and sales of inventory are
involved, nothing in section 446(b) prohibits the Secretary from
4 The notice of deficiency shows a $0.00 sec. 481
adjustment.
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