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property developer clients was for the construction of
foundations, driveways, and walkways. Thus, we cannot find that
petitioner is a merchant10 that has acquired "raw materials and
supplies" for sale, see sec. 1.471-1, Income Tax Regs., or that
holds and sells "goods purchased in condition for sale",
Wilkinson-Beane, Inc. v. Commissioner, supra at 354-355.
Third, foundations, driveways, and walkways are improvements
to real property. We have held previously that improvements to
real property are not merchandise. See Homes by Ayres v.
Commissioner, 795 F.2d 832, 835 (9th Cir. 1986) (tract houses are
not merchandise), affg. T.C. Memo. 1984-475 (rejecting taxpayer's
argument that a homebuilder "manufactures" houses); see also W.C
& A.N. Miller Dev. Co. v. Commissioner, 81 T.C. at 630 (developed
real property constructed and held for sale is not inventory).
Therefore, the foundations, driveways, and walkways are not
merchandise, and the materials used in their construction do not
"become a part of merchandise intended for sale". See sec.
10For purposes of accounting, "merchandise" is defined as
"Purchased articles of commerce held for sale; the inventory of a
merchant." Kohler, Kohler's Dictionary for Accountants 329 (6th
ed. 1983). Furthermore, "merchant" is defined as "One who buys
and sells articles of commerce without change in their form."
Id.
"In its commonly accepted usage, the term 'merchandise' is
defined to encompass wares and goods, not realty." W.C. & A.N.
Miller Dev. Co. v. Commissioner, 81 T.C. 619, 630 (1983).
Furthermore, "real property and the labor, materials and supplies
which enter into improving real property, are generally not
considered for accounting purposes to be inventoriable." Id.
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