- 15 -
Commissioner, supra at 371. Consequently, to prevail, a
taxpayer must prove that the Commissioner’s determination is
arbitrary, capricious, or without sound basis in fact or law.
See id.; Ford Motor Co. v. Commissioner, supra at 92.
To resolve this dispute, we consider sections 446 and 471
and the regulations thereunder. Under section 446(a), a
taxpayer computes taxable income on the basis of the method of
accounting it uses in keeping its books. Section 446(c)
describes the various accounting methods that a taxpayer may use
in computing taxable income, including the cash and accrual
methods.
Section 1.446-1(c)(2)(i), Income Tax Regs., provides that a
taxpayer who is required to use inventories must also use the
accrual method with regard to purchases and sales. Under
section 471 and section 1.471-1, Income Tax Regs., a taxpayer
must account for inventories if the production, purchase, or
sale of merchandise is an income-producing factor in the
taxpayer’s business and the taxpayer has acquired title to the
merchandise.
We consider the facts and circumstances of each case in
deciding whether an item is merchandise that is an income-
producing factor. See Honeywell, Inc. v. Commissioner, T.C.
Memo. 1992-453, affd. without published opinion 27 F.3d 571 (8th
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