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By notices of deficiency dated April 23, 1997, respondent
determined deficiencies of $140,025 and $211,979 in Mid-Del’s and
PC’s Federal income taxes, respectively. The crux of the
deficiencies was respondent’s determination, made pursuant to
section 446(b), that petitioners must use an accrual method to
compute their taxable income.
By separate petitions, petitioners commenced their cases in
this Court, and the cases were consolidated for trial.
Respondent argued at trial that the drugs used to treat patients
were merchandise, the purchase and sale of which were income-
producing factors in petitioners’ businesses, and that
petitioners, therefore, were required by section 1.471-1, Income
Tax Regs., to use the accrual method to compute their taxable
income. Petitioners asserted that the drugs were supplies used
in the course of treating patients and that section 1.471-1,
Income Tax Regs., was inapplicable.
Section 446(b) vests the Commissioner with broad discretion
to determine whether a particular method of accounting clearly
reflects income. See Knight-Ridder Newspapers, Inc. v. United
States, 743 F.2d 781, 788 (11th Cir. 1984); Ansley-Sheppard-
Burgess Co. v. Commissioner, 104 T.C. 367, 370 (1995). In
reviewing the Commissioner’s determination that a taxpayer’s
method of accounting does not clearly reflect income, the
function of the Court is to decide whether the Commissioner
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