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the taxpayer’s business and the taxpayer has acquired title to
the merchandise.
We consider the facts and circumstances of each case in
deciding whether material is merchandise that is an income-
producing factor. See Honeywell, Inc. v. Commissioner, T.C.
Memo. 1992-453, affd. without published opinion 27 F.3d 571 (8th
Cir. 1994); Wilkinson-Beane, Inc. v. Commissioner, T.C. Memo.
1969-79, affd. 420 F.2d 352 (1st Cir. 1970). Although not
specifically defined in the Internal Revenue Code or the
regulations, courts have ruled that “merchandise”, as used in
section 1.471-1, Income Tax Regs., is an item acquired and held
for sale. See, e.g., Wilkinson-Beane, Inc. v. Commissioner,
supra.
Respondent contends that, because the sand and gravel is
merchandise which is an income-producing factor in petitioner’s
business, petitioner must account for inventories and report its
taxable income under the accrual method of accounting.
Petitioner broadly argues that it does not have to account
for inventories under section 471 and section 1.471-1, Income Tax
Regs., because (1) its business consists of “procuring and
delivering * * * not acquiring and holding sand and gravel for
sale to customers”; therefore, the sand and gravel should not be
considered merchandise, and (2) even if the sand and gravel is
considered merchandise, the procurement of the sand and gravel is
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