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it is in a service business or that the logs are incidental to
its business activity. To the contrary, petitioner is in the
business of buying and selling logs.
The substance of the transactions demonstrates that
petitioner acquired logs and wood and held them for sale.
3. Income-Producing Factor
In evaluating whether merchandise is an income-producing
factor in a taxpayer’s business, we compare the cost of the
merchandise to the taxpayer’s gross receipts computed under the
cash method. See Wilkinson-Beane, Inc. v. Commissioner, supra.
In Wilkinson-Beane, Inc. v. Commissioner, 420 F.2d 352 (1st Cir.
1970), the Court of Appeals affirmed our holding that
merchandise the cost of which (in different taxable years)
constituted 14.7 percent and 15.4 percent of the taxpayer’s
gross receipts was a significant income-producing factor in the
taxpayer’s business. See also Knight-Ridder Newspapers, Inc. v.
United States, 743 F.2d 781, 790 (11th Cir. 1984) (wherein
newspapers, the cost of which constituted 17.6 percent of the
taxpayer’s total revenues, were considered a material income-
producing factor).
Here, the cost of the purchased wood was stipulated by the
parties as $23,099,069, which is 28 percent of petitioner’s
gross receipts for FYE 1995; $18,079,103, which is 23.6 percent
of petitioner’s gross receipts for FYE 1996; and $28,757,169,
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