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merchandise and a service. See Osteopathic Med. Oncology &
Hematology, P.C. v. Commissioner, 113 T.C. 376, 386 (1999). We
distinguish between materials held for sale and materials that
are consumed by the taxpayer in performing a service. See RACMP
Enters., Inc. v. Commissioner, supra at 224.
In RACMP Enters., Inc. v. Commissioner, supra, we were
presented with the question whether the raw materials (concrete
mix, sand, and drain rock) that a concrete contractor used in
completing contracts for the construction of foundations,
driveways, and walkways constituted merchandise within the
meaning of section 1.471-1, Income Tax Regs. Relying on
Osteopathic Med. Oncology & Hematology, P.C., v. Commissioner,
supra, we concluded that construction materials generally will
not be considered merchandise within the meaning of the
regulation if the inherent nature of the taxpayer’s business is
that of a service provider and the materials are an indispensable
and inseparable part of the rendering of the services. See RACMP
Enters., Inc. v. Commissioner, supra at 222.
In RACMP Enters., Inc. v. Commissioner, supra, we initially
concluded that the taxpayer/concrete contractor was a service
provider. See id. In reaching that conclusion, we noted that
construction contracts involve primarily the furnishing of labor
and contractual skills, and in the context of that case, the
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