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for supplies. The relevant difference is with respect to the
application of section 1.446-1(c)(2)(i), Income Tax Regs., which,
with an exception not here relevant, and taking into account
section 1.471-1, Income Tax Regs., requires an accrual method
with regard to purchases and sales of merchandise. The majority
agrees that the distinction between supplies and merchandise does
not turn on the nature of the underlying commodity:
“pharmaceuticals could reasonably be construed to be merchandise
in some contexts”. Majority op. p. 17. In Wilkinson-Beane, Inc.
v. Commissioner, 420 F.2d 352, 354 (1st Cir. 1970), affg. T.C.
Memo. 1969-79, the Court of Appeals for the First Circuit
determined that the meaning of the term “merchandise”, as used in
section 1.471-1, Income Tax Regs., “must be gathered from the
context and the subject.” The context and the subject are the
explicit requirement that a taxpayer’s method of accounting
clearly reflect income. See sec. 446(b). Income realized from
the sale of merchandise is most clearly measured by matching the
cost of that merchandise with the revenue derived from its sale.
Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d at 789.
Given the lack of any clearly pertinent distinction between the
term “supplies” and the term “merchandise”, where the facts raise
some question (as they do here), we should inquire which
classification results in a clearer reflection of the taxpayer’s
income.
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