Nemetschek North America, Inc. - Page 12

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          1970), affg. T.C. Memo. 1969-79.  Merchandise is an income-                 
          producing factor whenever its cost is significant to the                    
          taxpayer’s gross receipts computed under the cash method.  See,             
          e.g., Wilkinson-Beane, Inc. v. Commissioner, supra at 355                   
          (income-producing factor where cost of 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, 743 F.2d 781, 790 (11th Cir. 1984) (17.6                  
          percent of total cash receipts suggests that items 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).  Merchandise may be properly characterized as an                 
          income-producing factor even if it is not maintained in yearend             
          inventory.4  J.P. Sheahan Associates., Inc. v. Commissioner, T.C.           
          Memo. 1992-239.                                                             
               In the case of Diehl, it manufactured or purchased all of              
          its products, and its sale of those products was its only source            
          of income.  Under the facts at hand, we conclude that Diehl’s               
          products were “merchandise” and that Diehl’s sale of its                    
          merchandise was an income-producing factor in its business.                 


               4 In this regard, we disagree with petitioner that it is a             
          per se abuse of discretion when respondent’s change in method of            
          accounting generates adjustments to accounts receivable and not             
          to the amount of inventory at either the beginning or end of the            
          year.  We also disagree with petitioner’s assertion that the                
          fluctuation of the amount of yearend inventory is dispositive to            
          our analysis.                                                               



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