Nemetschek North America, Inc. - Page 13

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          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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