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its business and petitioner’s receipt of Olympic’s repair parts
worth approximately $61,000.
Discussion
Respondent determined that petitioner overstated its 1992
beginning inventory by $61,066. In computing a taxpayer’s gross
income, cost of goods sold is an offset or reduction from gross
receipts in determining income. See sec. 1.61-3(a), Income Tax
Regs. Cost of goods sold is determined by adding purchases to
the beginning inventory and subtracting the ending inventory.
The method for computing cost of goods sold is mechanical.
Petitioner argued that the $61,066 change in beginning
inventory was the result of its receiving additional available
repair parts from Olympic, which discontinued business
operations. Petitioner, however, failed to explain why it
treated repair parts as inventory. Petitioner’s primary business
was providing a service (transporting concrete and leasing
equipment). The leases to third parties, other than Olympic,
were effectively sales where the lessees/purchasers took care of
their own repairs. With respect to the lease to Olympic, the
repair parts were not shown to have been purchased or maintained
as inventory by petitioner. Substantially, petitioner was in a
service industry, and it is unclear why petitioner would regard
repair parts as inventory. That is so regardless of whether
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