Mid Del Therapeutic Center, Inc. - Page 18

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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                                 
            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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