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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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