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we believe petitioner bought wood in its other business
activities as well. Petitioner’s activities related to cutting
wood on land owned by unrelated entities, under the numerous
business activities such as the fixed price arrangements and
pay-as-cut arrangements, are also forms of purchasing wood
products for resale. Petitioner “bought” the timber (standing
trees) on the unrelated entity’s land, supervised cutting of the
timber, removed the logs using its own equipment and trucks, and
delivered the logs to the mills.
2. Merchandise
The logs and other wood products are merchandise to
petitioner. Although not specifically defined in the Internal
Revenue Code or the regulations, courts have ruled that
“merchandise”, as used in section 1.471-1, Income Tax Regs., is
an item acquired and held for sale. See, e.g., Wilkinson-Beane,
Inc. v. Commissioner, supra. Whether an item was acquired and
held for sale is governed by the substance of the transaction
and not its form. Honeywell, Inc. v. Commissioner, supra.
Thus, to determine whether an item is “merchandise”, we must
take into account the particular facts and circumstances of the
taxpayer in each case and the manner and context in which the
taxpayer operates the business at hand. Wilkinson-Beane, Inc.
v. Commissioner, supra; Thompson Elec., Inc. v. Commissioner,
T.C. Memo. 1995-292; Honeywell, Inc. v. Commissioner, supra;
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