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of labor or service and some element of merchandise or product.4
See, e.g., Thompson Elec., Inc. v. Commissioner, T.C. Memo. 1995-
292, where the taxpayer, an electrical contractor, used materials
such as wiring, conduits, electrical panels, and lighting
fixtures in its contracting business. The question that must be
considered is: “At what point do the materials become an income-
producing factor?” The taxpayer in Thompson Elec., Inc.,
maintained on its premises an inventory of unassigned materials
that were used for small contracts and, in addition, delivered
materials directly from the supplier to its large-contract
customers’ sites. In Thompson Elec., Inc., it was held that
those materials were merchandise that was an income-producing
factor even though: The taxpayer did not display the material to
customers or to the public, the material was not itemized on bids
or invoices nor separately charged to the customer, the taxpayer
did not sell material separately from its services, and the
taxpayer’s customers generally did not select the materials to be
used.
As in Thompson Elec., Inc., petitioner is a contractor but
is in the business of constructing concrete sidewalks, driveways,
and related structures. Petitioner makes bids and then contracts
4 The majority contends that the substantiality of the
materials or product is irrelevant to the question of whether or
not such items are merchandise. At least two cases, however,
have given weight to the proportion of such items to service.
See Wilkinson-Beane, Inc. v. Commissioner, 420 F.2d 352, 355 (1st
Cir. 1970), affg. T.C. Memo. 1969-79; Thompson Elec., Inc. v.
Commissioner, T.C. Memo. 1995-292.
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