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record, petitioner generates more profits if it both acquires and
transports sand and gravel for its customer rather than solely
acting as a transporter. Further, although not labeled by
petitioner as a markup in its business records, petitioner’s
profit for acquiring the sand and gravel is nevertheless a markup
since, in substance, the profit is based on a percentage of the
underlying cost of the sand and gravel. Furthermore, petitioner,
on its tax return, listed its business activity as the selling of
construction materials.
In RACMP Enters., Inc. v. Commissioner, 114 T.C. ___ (2000),
we recently held that respondent abused his discretion in placing
a construction contractor on the accrual method for Federal
income tax purposes. In that case, we concluded that the
material provided by the contractor to its customer, pursuant to
a construction contract for concrete foundations, driveways, and
walkways, was not merchandise within the meaning of section
1.471-1, Income Tax Regs. See id. In reaching that conclusion,
we viewed the construction contract as a service contract,
finding that the materials were indispensable to and inseparable
from the provision of that service and that the materials lost
their separate identity during the construction activity. See
id.; see also Osteopathic Med. Oncology & Hematology, P.C. v.
Commissioner, 113 T.C. 376 (1999) (wherein drugs used as part of
chemotherapy treatments were not considered merchandise because
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