Edward G Smith and Jan M. Smith - Page 12

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          project and to provide additional services to the companies                 
          contracting for the installation of the flooring materials.  In             
          particular, Smith Floors takes delivery of flooring materials at            
          its warehouse, inspects the materials to ensure that they conform           
          in both quality and quantity with the specifications for the                
          particular job, inspects the job site to verify that installation           
          may proceed, and delivers the flooring materials to the job site            
          in advance of the installation date to allow the materials to               
          “acclimate” to the environment.  Smith Floors charges its                   
          customers for those services as a percentage markup on the cost             
          of the flooring materials.                                                  
          Smith Floors frequently installs either proprietary or                      
          custom-designed flooring materials.  Normally, the companies                
          contracting with Smith Floors negotiate the price of such                   
          flooring materials in advance directly with the manufacturer of             
          the flooring materials.  Smith Floors is neither a manufacturer             
          of merchandise nor a retail seller of flooring materials.                   
               Based on the foregoing, we hold that Smith Floors does not             
          produce, purchase, or sell merchandise within the meaning of                
          section 1.471-1, Income Tax Regs.  Smith Floors’ practice of                
          purchasing the flooring materials for a particular job is                   
          incidental and secondary to Smith Floors’ provision of flooring             
          installation services.  Accordingly, considering all of the facts           
          and circumstances of the instant case, we hold that respondent’s            

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