- 13 -
Accord Applied Communications, Inc. v. Commissioner, T.C. Memo.
1989-469 (seller of prepackaged software required to use accrual
method to report its “software sales”). Petitioner invites the
Court to hold that Diehl’s primary product was not “merchandise”
under section 1.471-1, Income Tax Regs., because it was
intellectual property. We decline to do so. Each of Diehl’s
products generally consisted of a package with manuals and a
disk. We believe that where this package is held for sale as an
item and imbued with the characteristics which one normally
associates with merchandise, it is “merchandise” for purposes of
section 1.471-1, Income Tax Regs. Given the fact that most of
Diehl’s sales involved transfers of tangible products, the
purchase and sale of those products required Diehl, on the basis
of the record at hand, to use an overall accrual method as
determined by respondent.5
Petitioners’ final argument centers on the fact that Diehl
changed from the cash method to an accrual method 2 years after
the subject year in order to comply with section 448(a).
Petitioner rationalizes on brief that requiring the change in the
subject year is “unreasonable, offering no practical benefit to
5 The fact that Diehl’s business is product oriented, rather
than service oriented, also distinguishes this case from
Honeywell v. Commissioner, T.C. Memo. 1992-453, affd. 74 AFTR 2d
5192 (8th Cir. 1994), the primary case relied upon by petitioner.
There, the Court held that the taxpayer, a servicer of computer
equipment, did not have to inventory the materials which it used
in its businesses because those materials were incidental to its
service-oriented business. See also Osteopathic Med. Oncology &
Hematology, P.C. v. Commissioner, 113 T.C. 376 (1999).
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