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petitioners and consumed by the patients, that the cost of the
drugs was significant, and that the permissible charges for the
drugs were listed separately on bills submitted by petitioners to
third-party insurers. Respondent relied on the seminal case of
Wilkinson-Beane, Inc. v. Commissioner, 420 F.2d 352 (1st Cir.
1970), affg. T.C. Memo. 1969-79,4 for the proposition that the
drugs were merchandise. See also Tebarco Mechanical Corp. v.
Commissioner, T.C. Memo. 1997-311; Thompson Elec., Inc. v.
Commissioner, T.C. Memo. 1995-292; J.P. Sheahan Associates., Inc.
v. Commissioner, T.C. Memo. 1992-239; Surtronics, Inc. v.
Commissioner, T.C. Memo. 1985-277; Epic Metals Corp. & Subs. v.
Commissioner, T.C. Memo. 1984-322, affd. without published
opinion 770 F.2d 1069 (3d Cir. 1985).
Our evaluation of the facts and circumstances presented by
Mid-Del I, as well as the legal environment from which
respondent’s litigating position evolved, leads us to the
conclusion that respondent’s litigating position in Mid-Del I was
substantially justified. See Stieha v. Commissioner, supra at
790-791. The issue of whether drugs used in treating patients
4In Wilkinson-Beane, Inc. v. Commissioner, 420 F.2d 352 (1st
Cir. 1970), affg. T.C. Memo. 1969-79, the Court of Appeals for
the First Circuit held that caskets sold by service-oriented
businesses were merchandise even though the caskets were not held
for sale in the traditional retail context. The taxpayer was a
funeral home that sold caskets as part of the funeral services it
provided to customers.
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