Herbert C. Haynes, Inc. - Page 20

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          which is 33 percent of petitioner’s gross receipts for FYE 1997.            
          The business activity related to purchased wood was a                       
          substantial income-producing factor to petitioner.                          
               Considering the cost of the purchased wood plus the                    
          business activities of cutting trees on land owned by unrelated             
          entities, the cost of the wood that petitioner purchased was 43             
          percent of the gross receipts for FYE 1995 ($23,099,969 +                   
          $12,333,559), 39 percent of the gross receipts for FYE 1996                 
          ($18,079,103 + $12,136,789), and 49 percent of the gross                    
          receipts for FYE 1997 ($28,757,169 + $13,588,715).                          
               Considering wood that petitioner purchased from related                
          entities, these percentages are even higher.                                
               Accordingly, petitioner must maintain inventories and use              
          the accrual method to account for purchases and sales.                      
          Petitioner’s use of the cash method does not clearly reflect its            
          sales income.                                                               
          IV. Other Arguments Raised by Petitioner                                    
               Petitioner claims that it is a grower and harvester of                 
          trees.  Petitioner argues that “the Code literally, explicitly,             
          and intentionally permits a company that ‘harvests’ timber to               
          use the cash method of accounting” and that respondent cannot               
          force petitioner to change an accounting method specifically                
          authorized by the Internal Revenue Code.  Petitioner cites                  
          sections 447 and 448 in support of this argument.                           






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