Von Euw & L.J. Nunes Trucking, Inc. - Page 9

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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,                
               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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