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income-producing factor. That standard requires comparison of
the cost of the merchandise to the taxpayer’s gross receipts
computed under the cash method of accounting. See Wilkinson-
Beane, Inc. v. Commissioner, 420 F.2d 352, 355 (1st Cir. 1970),
affg. T.C. Memo. 1969-79; Knight-Ridder Newspapers, Inc. v.
United States, 743 F.2d at 790; Euw v. Commissioner, T.C. Memo.
2000-114.
If the cost of material that a taxpayer uses to provide a
service is substantial compared to its receipts, the material
is a substantial income-producing factor. See Wilkinson-Beane,
Inc. v. Commissioner, supra at 355 (income-producing factor
where the cost of the coffin was included in price of funeral
package and represented 15.4 percent and 14.7 percent of cash
basis receipts); Knight-Ridder Newspapers, Inc. v. United
States, supra at 790 (17.6 percent of total cash receipts
suggests that supplies are an income-producing factor);
Thompson Elec., Inc. v. Commissioner, T.C. Memo. 1995-292
(income-producing factor where cost of materials consisted of
37 percent to 44 percent of gross receipts).
Petitioner’s business operations consisting of the sale
and delivery of merchandise are similar to the facts presented
in Euw v. Commissioner, supra. In Euw, the taxpayer operated a
sand and gravel transportation business that acquired and
delivered sand and gravel to its customers during the same
business day. The cost of sand and gravel constituted
31 percent of the taxpayer’s gross receipts. The taxpayer was
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