Edward G Smith and Jan M. Smith - Page 11

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          taxpayer did not hold concrete materials for sale but rather                
          consumed the materials in performing a service.  See id.                    
               We further concluded:  (1) The ephemeral quality of liquid             
          concrete precluded such material from being considered                      
          merchandise; and (2) the remaining materials used by the                    
          taxpayer, including sand, drain rock, and hardware, were                    
          incorporated into the particular project to such a degree that              
          they lost their separate identity, and likewise should not be               
          considered merchandise within the meaning of the regulation.  Id.           
          at 225-229.                                                                 
               Consistent with our analysis in RACMP Enters., Inc. v.                 
          Commissioner, supra, we hold that the flooring materials that               
          Smith Floors purchases and installs in fulfilling its contracts             
          do not constitute merchandise within the meaning of section                 
          1.471-1, Income Tax Regs.  Like the concrete contractor in RACMP            
          Enters., Inc. v. Commissioner, Smith Floors is inherently a                 
          service provider.  Smith Floors’ stock in trade is its expertise            
          in installing flooring materials in a variety of unique                     
          applications and petitioner’s skill and craftsmanship in hand-              
          cutting and incorporating specialized designs into flooring                 
          materials.  The companies contracting with Smith Floors are                 
          primarily interested in the firm’s labor and contractual skills.            
               Smith Floors purchases and takes delivery of the flooring              
          materials required for a particular job to better manage the                

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