114 T.C. No. 16
UNITED STATES TAX COURT
RACMP ENTERPRISES, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23954-97. Filed March 30, 2000.
P is a construction contractor that enters into
contracts to construct, place, and finish concrete
foundations, driveways, and walkways for real property
developers. P uses the cash method to recognize income
and to expense the cost of concrete and other
materials. R determined that the material P uses in
providing service to its clients is "merchandise" under
sec. 1.471-1, Income Tax Regs., and that P must report
its income on the accrual method of accounting.
Held: P's contract to provide labor and material
to a real property developer is a contract to provide
service, and the material is an indispensable and
inseparable part of the provision of that service. See
Osteopathic Med. Oncology & Hematology, P.C. v.
Commissioner, 113 T.C. 376, 384 (1999).
Held, further, material that is provided by a
construction contractor according to the terms of a
contract that requires the provision of labor and
material, and which, when combined with other tangible
personal property, loses its separate identity to
become an integral and inseparable part of a building
or other real property, is not merchandise within the
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