- 16 -
P.C. v. Commissioner, 113 T.C. 376 (1999).
By regulation, the Secretary has determined that
inventories at the beginning and end of each taxable
year are necessary in every case in which the
production, purchase, or sale of merchandise is an
income-producing factor. The inventory should include
all finished or partly finished goods and, in the case
of raw materials and supplies, only those which have
been acquired for sale or which will physically become
a part of merchandise intended for sale, * * *. [Sec.
1.471-1, Income Tax Regs.; emphasis added.4]
Therefore, a determination of whether the taxpayer produces,
purchases, or sells "merchandise" is preliminary to any
determination of whether the taxpayer must account for inventory.
See Homes by Ayres v. Commissioner, 795 F.2d 832, 835 (9th Cir.
1986), affg. T.C. Memo. 1984-475.
Neither the Internal Revenue Code (the Code) nor the
regulations define "merchandise" or "inventory" or clearly
distinguish between "materials and supplies" that are not
actually consumed and remain on hand, and inventory. Wilkinson-
Beane, Inc. v. Commissioner, supra at 354 (noting "the lack of
any clearly pertinent definition of 'merchandise' in the relevant
tax sources"); Osteopathic Med. Oncology & Hematology, P.C. v.
Commissioner, supra at 382. Furthermore, the differences that
distinguish supplies from merchandise are determined by context
4Completing the statutory and regulatory scheme, sec. 1.446-
1(c)(2)(i), Income Tax Regs., provides that a taxpayer that has
inventory must also use the accrual method of accounting with
regard to purchases and sales.
Page: Previous 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NextLast modified: May 25, 2011