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its bid, petitioner used the total cost of labor and materials as
a basis to calculate the value of its service.
In calculating its potential profit, petitioner had to
consider the complexity of the work, and, therefore, its
potential for loss in case of errors. For instance, contracts
for construction projects that use a greater amount of concrete
and other materials, or involve curved rather than straight
lines, are more difficult to perform. The quantity of the
material used was another factor in this estimation. The
consideration of such costs, however, does not dictate the
classification of the material as inventory. See Osteopathic
Med. Oncology & Hematology, P.C. v. Commissioner, supra;
Honeywell, Inc. v. Commissioner, supra. That petitioner used the
total cost of labor and materials as a base to calculate the
project profit does not mean that petitioner sold merchandise to
its clients.
We have found that petitioner's contracts with its real
property developer clients are service contracts, that the
material provided by petitioner is indispensable to and
inseparable from the provision of that service, that the
materials lost their separate identity to become part of the real
property in the construction activity, and that, in substance, no
sale of merchandise occurred between petitioner and its clients.
The bottom line is that petitioner did not hold merchandise for
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