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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.
By regulation, the Secretary has determined that inventories are
necessary in every case in which the production, purchase, or
sale of merchandise is an income-producing factor in the
taxpayer's business. See sec. 1.471-1, Income Tax Regs. Unless
otherwise authorized by the Commissioner, a taxpayer who is
required to maintain inventories must use an accrual method of
accounting with regard to purchases and sales of inventory. See
Asphalt Prods. Co. v. Commissioner, 796 F.2d 843, 849 (6th Cir.
1986), affg. in part and revg. in part Akers v. Commissioner,
T.C. Memo. 1984-208, revd. on another issue 482 U.S. 117 (1987);
sec. 1.446-1(c)(2)(i), Income Tax Regs.
Respondent argues that the drugs at issue in this case are
merchandise, the purchase and sale of which are income-producing
factors in petitioners’ businesses, and, therefore, petitioners
are required to use the accrual method of accounting to report
their taxable income.6 Petitioners take exception to respondent's
characterization of the drugs, countering that the drugs are
supplies used in the course of treating patients, with the result
6Respondent does not argue in this case that Mid-Del failed
to satisfy the book consistency requirement. See sec. 446(a).
Respondent’s arguments are directed solely to whether Mid-Del had
inventories within the meaning of sec. 471.
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