- 34 -
sale, and there simply was no sale of merchandise between
petitioner and its clients. See Osteopathic Med. Oncology &
Hematology, P.C. v. Commissioner, supra; Honeywell, Inc. v.
Commissioner, supra.
C. Income-Producing Factor
Respondent may require petitioner to use an inventory method
of accounting only if we find each of the following as facts:
(1) Petitioner produced, purchased, or sold merchandise, and (2)
petitioner’s production, purchase, or sale of that merchandise
was an income-producing factor. See Osteopathic Med. Oncology &
Hematology, P.C. v. Commissioner, supra; Honeywell, Inc. v.
Commissioner, supra. Section 1.471-1, Income Tax Regs., does not
provide that any material that is an income-producing factor is
ipso facto merchandise. We have found that petitioner does not
produce, purchase, or sell merchandise; therefore, whether the
material is an income-producing factor is irrelevant. See
Osteopathic Med. Oncology & Hematology, P.C. v. Commissioner,
supra.
Accordingly, we find that petitioner is not required to use
an inventory method of accounting.
Issue 2. Whether Respondent Abused His Discretion in Determining
That Petitioner's Use of the Cash Method of Accounting
Did Not Clearly Reflect Its Income
"'The cash method of accounting has been widely used
throughout the contracting industry and accepted by respondent
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