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Income-Producing Factor
Respondent determined that the purchase and sale of
petroleum products was merchandise and an income-producing
factor in petitioner’s business. Even though petitioner
maintains inventories, petitioner argues that its inventories
are not an income-producing factor because the amount of its
inventory at the end of the years in issue was insignificant
and represents 4.91 percent and 3.73 percent, respectively, of
total sales during the years in issue.
Section 471(a) provides:
SEC. 471. GENERAL RULE FOR INVENTORIES.
(a) General Rule.–-Whenever in the opinion of
the Secretary the use of inventories is necessary in
order clearly to determine the income of any
taxpayer, inventories shall be taken by such taxpayer
on such basis as the Secretary may prescribe as
conforming as nearly as may be to the best accounting
practice in the trade or business and as most clearly
reflecting the income.
Under section 1.471-1, Income Tax Regs., a taxpayer must
account for inventories if the production, purchase, or sale of
merchandise is an income-producing factor in the taxpayer’s
business. A taxpayer who is required to maintain inventories
must use the accrual method of accounting with regard to
purchases and sales. See sec. 1.446-1(c)(2)(i), Income Tax
Regs.
Petitioner’s argument that the amount of inventories it
maintains is insignificant ignores the recognized standard used
when evaluating whether petitioner’s petroleum products are an
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Last modified: May 25, 2011