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respondent’s argument as to why petitioners are required to use
the accrual method is based solely on his position that the drugs
used by petitioners are merchandise that must be inventoried.
Respondent does not dispute that petitioners’ use of the cash
method clearly reflects income to the extent that the drugs are
not merchandise. Because we hold that petitioners' drugs are not
merchandise, it follows that petitioners are neither required to
maintain inventories with respect to their drugs by section
1.471-1, Income Tax Regs., nor required to use an accrual method
by section 1.446-1(c)(2)(i), Income Tax Regs. See Osteopathic
Med. Oncology & Hematology, P.C. v. Commissioner, supra at 391-
392.
We hold, therefore, that respondent abused his discretion
in requiring petitioners to change from the cash method of
accounting to an accrual method.
7(...continued)
is the recognition that petitioners’ cash method of accounting
does reflect their income clearly, albeit not as clearly as the
accrual method. Although the language used in respondent’s
notices of deficiency may be nothing more than a verbal foot-
fault, or an ill-phrased attempt to summarize the requirements of
sec. 471(a), respondent has offered no evidence to explain why
the determinations were phrased as stated in the notices.
Although the Commissioner’s determination that a taxpayer’s
method of accounting does not clearly reflect its income is
entitled to great deference, the Commissioner may not require a
taxpayer to change from a method of accounting that clearly
reflects income to another method of accounting because the
Commissioner determines that the alternate method will reflect
the taxpayer’s income more clearly. See Ansley-Sheppard-Burgess
Co. v. Commissioner, 104 T.C. 367, 371 (1995).
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