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HALPERN, J., dissenting:
I. Introduction
Petitioner is a concrete contractor, licensed by the State
of California to construct, place, and finish concrete
foundations and flatwork. In performing its work, petitioner
uses ready-mix concrete, sand, rock, various hardware items, and
lumber (the materials), all of which (except, possibly, the
lumber) belong to someone else at the end of the job. For the
taxable year in question, petitioner treated as an expense, and
deducted on its Federal income tax return, all payments actually
made by it during the year for the materials. It included in
gross income only payments actually received by it during the
year.
The majority addresses the question of whether petitioner
must take inventories. In pertinent part, section 1.471-1,
Income Tax Regs., provides: “In order to reflect taxable income
correctly, 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 majority decides that petitioner need not take inventories.
It does so on the following basis:
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
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