RACMP Enterprises, Inc. - Page 1

                                   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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