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thereunder to determine that the cash method of accounting does
not clearly reflect the taxpayer's income.
Section 471 provides in pertinent part:
SEC. 471(a). General Rule.--Whenever in the opinion of
the Secretary the use of inventories is necessary in order
clearly to determine the income of any taxpayer, inventories
shall be taken by such taxpayer on such basis as the
Secretary may prescribe as conforming as nearly as may be to
the best accounting practice in the trade or business and as
most clearly reflecting the income.
Section 1.471-1, Income Tax Regs., in turn provides in
pertinent part:
Need for inventories.-- In order to reflect taxable income
correctly, inventories at the beginning and end of each
taxable year are necessary in every case in which the
production, purchase, or sale of merchandise is an
income-producing factor. * * *
Thus, a taxpayer must use inventories if the production,
purchase, or sale of merchandise is an income-producing factor.
See id. Whether the production, purchase, or sale of merchandise
is an income-producing factor is decided under the facts and
circumstances of each case. See Thompson Elec., Inc. v.
Commissioner, T.C. Memo. 1995-292; Honeywell & Subs., Inc. v.
Commissioner, T.C. Memo. 1992-453, affd. without published
opinion 27 F.3d 571 (8th Cir. 1994).
A taxpayer that uses inventories must also generally use the
accrual method of accounting. See sec. 1.446-1(c)(2)(i), Income
Tax Regs. As we stated in Ansley-Sheppard-Burgess Co. v.
Commissioner, supra at 377, a taxpayer who is required to use
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