T.C. Memo. 2000-130
UNITED STATES TAX COURT
MID-DEL THERAPEUTIC CENTER, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
D. RICHARD ISHMAEL, M.D., PC, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 9060-97, 9270-97. Filed April 11, 2000.
Bruce A. Moates and LeRoy D. Boyer, for petitioners.
Elizabeth Downs, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined a deficiency of
$211,979 in petitioner D. Richard Ishmael, M.D., PC's 1995
Federal income tax, and a deficiency of $140,025 in petitioner
Mid-Del Therapeutic Center, Inc.'s Federal income tax for the
taxable year ended April 30, 1995. Both petitioners petitioned
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the Court to redetermine the respective deficiencies. These
cases were consolidated for purposes of trial, briefing, and
opinion because they involve common questions of law and fact.
The deficiencies result from respondent's determination,
pursuant to section 446(b),1 that petitioners must use an accrual
method of accounting to report their taxable income. The
ultimate issue to be decided is whether respondent abused his
authority under section 446(b) by requiring petitioners to change
from the cash receipts and disbursements method of accounting
(the cash method) to the accrual method. In order to decide that
issue, we must examine the related question of whether
chemotherapy drugs and related medications (the drugs),
administered by petitioners to patients during the course of
medical treatments, are merchandise which must be inventoried.
We hold that the drugs in question are not merchandise and that
respondent abused his discretion under section 446(b) by
requiring petitioners to change from the cash method to the
accrual method of accounting.
1
All section references are to the Internal Revenue Code in
effect for the taxable years in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure. For
convenience, all monetary amounts have been rounded to the
nearest dollar.
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FINDINGS OF FACT
Some of the relevant facts have been stipulated and are so
found. The stipulation of facts is incorporated herein by this
reference.
Petitioner Mid-Del Therapeutic Center, Inc. (Mid-Del), and
petitioner D. Richard Ishmael, M.D., PC (PC), are Oklahoma
corporations,2 each of which operates a chemotherapy clinic in
the Oklahoma City metropolitan area (collectively, the clinics).
On the dates the petitions in these consolidated cases were
filed, the principal place of business of Mid-Del was in Midwest
City, Oklahoma, and the principal place of business of PC was in
Oklahoma City, Oklahoma. Dr. D. Richard Ishmael, an oncologist,
owns 100 percent of the stock of both Mid-Del and PC. PC is Dr.
Ishmael's personal service corporation, and Mid-Del is a
subchapter C corporation, owned and managed by Dr. Ishmael.
The Clinics in General
Petitioners' clinics have provided outpatient chemotherapy
treatment to Dr. Ishmael's patients since 1988. Prior to 1988,
Dr. Ishmael administered chemotherapy treatments to patients in
hospitals on an inpatient basis. By 1988, various drugs had been
developed to mitigate the severe nausea associated with
2
Mid-Del was incorporated in 1991, and PC was incorporated
in 1982.
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chemotherapy. These drugs enabled patients to receive
chemotherapy treatments on an outpatient basis. When Medicare
decided not to pay for inpatient chemotherapy under most
circumstances, that decision effectively forced chemotherapy out
of hospitals and into outpatient clinics.
During the period in issue, PC employed a staff of employees
consisting of nurses, nursing assistants, laboratory technicians,
physician assistants, administrative clerks, pharmacists,
pharmacy technicians, and office maintenance workers. Mid-Del
had no employees, but instead used contract nursing services
leased through the Cancer Care Network and paid a common
paymaster for doctors’ services and other labor costs. PC
provided administrative services, including bookkeeping and
billing, for both clinics. Mid-Del paid PC an annual fee for
these administrative services.
Treatment of Patients
Many local doctors referred patients to the clinics for
treatment of cancer, lupus, AIDS, and some types of arthritis.
Dr. Ishmael scheduled 2 days a week to see patients at each of
the clinics. As a general rule, he saw patients at the PC clinic
on Mondays and Wednesdays and at the Mid-Del clinic on Tuesdays
and Thursdays. The clinics' hours were Monday through Friday,
from 8 a.m. to 5 or 6 p.m. Chemotherapy treatments were
administered at both clinics 5 days a week.
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On a patient's first visit, Dr. Ishmael examined the patient
in order to determine the proper chemotherapy treatment (if any)
for that patient. When Dr. Ishmael prescribed a chemotherapy
treatment, his order for the patient's individualized
chemotherapy treatment was recorded in the patient's file, which
was maintained at the clinic where that patient received
treatment. Once a patient was evaluated and a chemotherapy
regimen had been prescribed, the patient began regular, periodic
treatments, which could continue for several months or years.
Dr. Ishmael wrote prescriptions for any drugs a patient needed
that were not administered by the clinics.
Once a patient began a chemotherapy regimen, that patient
would see Dr. Ishmael approximately every 4 to 6 weeks for
reevaluation. However, patients generally did not see Dr.
Ishmael each time they came to the clinic for treatment. While a
doctor had to be available in the office to respond to medical
emergencies during working hours, one was not required to be
present in the treatment room while a chemotherapy treatment was
being administered. When Dr. Ishmael was not available,
arrangements with other physicians ensured the availability of a
physician in the event of an emergency.
Prior to every chemotherapy treatment, a patient had blood
tests, which were performed at the clinics upon the patient's
arrival. A nurse drew the blood to be tested, and a lab
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technician performed the tests at the in-office lab. Blood tests
were performed in order to insure that the patient was not too
ill to receive the chemotherapy treatment. If a patient's blood
count indicated that the patient was too ill for the prescribed
treatment, a nurse would contact Dr. Ishmael, who then might
prescribe a reduced dosage. When the test results indicated a
patient could receive his chemotherapy safely, the pharmacist was
notified to prepare the appropriate chemotherapy treatment for
the patient, as previously prescribed by Dr. Ishmael. Mid-Del
sent its orders for preparation of chemotherapy treatments to the
pharmacist at the PC clinic by fax machine and received the
prepared treatments from the PC pharmacist via courier service.
Registered nurses administered the chemotherapy treatments
and provided extensive counseling and education to patients
regarding their treatments. The nurses spent a large amount of
time counseling patients because of the profound psychological
effects of chemotherapy treatments. Administration of a
chemotherapy treatment to a patient generally took 2 to 8 hours.
A few patients were equipped with an apparatus which slowly
administered their treatment over a period of days. Other
patients received drugs that required the nurse to sit with the
patient throughout the treatment and closely monitor the
administration of the drug and the reaction of the patient. Dr.
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Ishmael frequently adjusted a patient's chemotherapy treatment in
accordance with the patient's response to the treatment.
The Chemotherapy Drugs and Ancillary Medications Used in
Treatments
After a chemotherapy drug has been tested and scientifically
proven effective to treat a particular condition, it is approved
for use by the Food and Drug Administration. Once a drug is
approved, it can be used to treat conditions other than those for
which it is approved because chemotherapy drugs may be effective
against multiple forms of cancer. For example, a drug approved
for use against ovarian cancer might be used to treat lung
cancer, even though its use to treat lung cancer is not an
approved use. Petitioners were not reimbursed by Medicare for
their use of approved drugs if the condition for which the drug
was administered was not an approved use, on the grounds that
such treatments were experimental.
Dr. Ishmael treated some of his patients with drugs that
were not approved for a particular condition when he believed the
drug would help those patients, even though he knew that Medicare
or nongovernmental health insurance carriers (private insurers)
would not pay for costs associated with experimental treatments.
Although petitioners bore the cost of these treatments, Dr.
Ishmael authorized the treatments when he felt that they were
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appropriate because his overriding concern was the welfare of his
patients.3
Dr. Ishmael, petitioners’ staff, and petitioners’ patients
viewed the chemotherapy treatments, and the drugs used in those
treatments, as medical services, not as the purchase and sale of
drugs.
The Pharmacy
PC maintained an onsite pharmacy, where chemotherapy drugs
purchased by both PC and Mid-Del were stored and where a
pharmacist employed by PC mixed and prepared chemotherapy
treatments; i.e., mixtures of chemotherapy drugs in prescribed
amounts, for both clinics. Chemotherapy drugs purchased by Mid-
Del were accounted for separately and held in a separate area
from chemotherapy drugs purchased by PC. Mid-Del paid PC a
monthly fee for PC's provision of pharmacy services to Mid-Del.
Petitioners used approximately 85 different chemotherapy
drugs to treat patients. Generally, petitioners attempted to
keep a 2-week supply of each drug on hand, although some
chemotherapy drugs were ordered on an as-needed basis.
Petitioners sometimes stocked up on a newly approved chemotherapy
3
For example, Dr. Ishmael prescribed an experimental drug,
Taxotere, for a patient dying of lung cancer. The patient had
been doing very poorly and was getting ready to enter a hospice
program, but Dr. Ishmael persuaded her family to allow him to
provide the treatment. Treatment continued despite a cost to the
clinic of $10,000 per week. The treatment was successful.
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drug if they had a patient population that would benefit from
that drug.
PC's computer system kept a constantly updated record of
each clinic's stock of chemotherapy drugs and ancillary
pharmaceuticals. Drug orders were placed automatically and
electronically by computer when the onhand quantity of a
particular drug dropped to a predetermined minimum balance.
Petitioners’ software only tracked drugs.
The shelf lives for chemotherapy drugs varied from about 6
months to 1 year in an unmixed state. A mixed or prepared
chemotherapy treatment generally had to be used within 3 to 24
hours.
Billing and Reimbursement
Each time a patient visited a clinic for treatment, a nurse
completed a charge sheet. The charge sheet was then used to bill
the patient or the party primarily responsible for payment. The
charge sheet indicated the patient's diagnosis and the amounts of
chemotherapy drugs administered, as well as any other medications
or procedures used in treating the patient on that day. After
the patient's treatment for that day was complete, the charge
sheet was forwarded to the billing department at PC to determine
the amount to be charged or billed.
Most clinic patients had Medicare or private insurance
coverage. For such patients, petitioners filed for payment
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directly with Medicare or the insurance company.4 Thus, most
bills were submitted to Medicare or private insurers.
In accordance with Medicare regulations and private
insurers’ requirements, the submitted bills reflected the
specific drugs, and amounts thereof, administered to each
patient. Each compensable service and drug provided in the
course of chemotherapy treatment was assigned a specific code for
billing purposes. The billing code for a particular chemotherapy
drug was referred to as its "J-code", which corresponded to a
specific drug and a specific amount of that drug. A
miscellaneous J-code was used for drugs that had not been
assigned a specific J-code.
Petitioners' charges for chemotherapy drugs were based on
the drugs' average wholesale price (AWP), which was determined by
reference to the "Red Book", a publication that PC received
annually. To determine the amount charged for each drug, the
billing department multiplied the AWP by a certain multiple,
which varied depending upon whether the bill was being submitted
to a private insurer or Medicare. On the other hand, although
AWP was the starting point used to calculate the charges made for
4
Only "Medicare providers" may bill Medicare directly.
Prior to 1995, petitioners were not "Medicare providers" and,
therefore, billed the patients directly. The patients then
submitted their bills to Medicare for reimbursement. In 1995,
petitioners were “Medicare providers” and billed Medicare
directly for medical services provided to covered patients.
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chemotherapy drugs for both Medicare and private insurers, the
reimbursement policies of the private insurers changed
frequently, affecting the amount that petitioners actually
collected and the predictability of the billing and collection
process.
Petitioners' bills also included charges for Dr. Ishmael's
professional services,5 administration of the chemotherapy
treatments, other supplies, miscellaneous medications, and
laboratory items.
Determinations regarding reimbursement of charges were made
by Medicare and private insurers on an item-by-item basis.
Medicare and the insurance companies took similar positions
regarding some items. For example, neither Medicare nor the
insurance companies paid for unapproved chemotherapy treatments.
Thus, petitioners were reimbursed for chemotherapy drugs used
during chemotherapy treatments only if the drug administered to
the patient had been approved for that specific therapeutic
purpose.
The reimbursement policies of Medicare and the private
insurers with respect to other items differed. For example, the
extra cost incurred by petitioners for a staff pharmacist to mix
the chemotherapy treatments was not specifically reimbursed by
5
Mid-Del did not bill patients or insurers for Dr. Ishmael’s
professional services. Instead, PC billed patients and insurers
for all of the doctor’s services, wherever provided.
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Medicare. Medicare did not reimburse petitioners for nondrug
supplies used in administering treatments. Some private
insurers, however, did cover these charges.
With respect to chemotherapy drugs, petitioners' claims for
reimbursement included only charges for chemotherapy drugs
prepared from petitioners' own supply and administered by
petitioners’ nursing staff to the patient.
When petitioners received a payment from Medicare or an
insurance company, they also received an "Explanation of
Benefits" (EOB), which detailed amounts allowed and disallowed as
to each specific charge and amounts due (copay amounts) from
secondary insurance or the patient as to each specific charge.
Petitioners routinely wrote off disallowed charges as they
received EOB’s from the insurance companies. Petitioners wrote
off the disallowed charges because agreements with the insurance
companies prevented petitioners from seeking payment for those
charges from the patients directly. Copay amounts were not
written off as long as the patient continued to receive
treatments, even if the patient was indigent or full payment was
not otherwise expected. Petitioners kept daily, monthly, and
annual summaries of charges, reimbursements, and writeoffs.
When PC's billing office determined from an EOB that an
allowable charge had been disallowed, a corrected bill or
explanation was submitted, and the writeoff of the disallowed
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amount would be delayed until a revised EOB was received. A
substantial percentage of the claims filed by petitioners with
Medicare and other insurance companies was rejected the first
time and had to be resubmitted.
Some patients who did not have any medical insurance
coverage or who could not afford their copayments were treated at
the clinics. Dr. Ishmael expected these patients to pay whatever
they could afford. The business office usually tried to work out
some sort of payment schedule, even if the payment would only
cover a small portion of the cost of treatment. No attempt was
made to charge only what a patient could afford or to write down
an account in expectation of what ultimately might be collected.
Eventually, if an account showed no activity for an extended
period of time because a patient had died, left the area, or
other circumstances indicated that the account was wholly
worthless, petitioners wrote off the entire account.
Neither petitioner had signs in its clinics that indicated
payments should be arranged before services were rendered.
Petitioners never charged interest or finance charges on patient
accounts. At least in part because of the patients' medical
conditions, petitioners did not use aggressive collection
practices.
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Accounting Issues–Background
It is a customary and accepted practice in the health care
industry for health care practitioners to use the cash method of
accounting. PC used the cash method of accounting for both
income tax purposes and for bookkeeping purposes and consistently
reported the drugs used in patient treatments as supplies and not
as inventory. With the exception of its Federal income tax
return for 1993, Mid-Del used the cash method of accounting for
income tax purposes and consistently reported the drugs used in
patient treatments as supplies and not as inventory. Mid-Del
used the accrual method of accounting for bookkeeping purposes.
PC reported the following gross receipts, direct costs
associated with patient treatments, and gross profit for the
taxable years ending April 30, 1993, 1994, and 1995, using the
cash method of accounting:
TYE Gross Other costs Gross Medical supplies and Medical
receipts1 profit drugs included in supplies and
other costs drugs as a
percentage of
gross receipts
04/30/93 $1,519,988 $425,554 $1,094,434 $183,136 12
04/30/94 2,106,670 454,982 1,651,688 367,793 17
04/30/95 2,100,440 513,006 1,587,434 451,976 22
1
Net of returns and allowances.
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Mid-Del reported the following gross receipts, direct costs
associated with patient treatments, and gross profit for 1993,
1994, and 1995, using the cash method of accounting:
TYE Gross Other costs Gross Medical supplies and Medical supplies
receipts1 profit drugs included in and drugs as a
other costs percentage of
gross receipts
1993
amended2 $1,849,403 $643,959 $1,205,444 unknown unknown
1994 2,469,928 806,510 1,663,418 $806,510 33
1995 1,780,767 721,944 1,058,823 721,994 41
1
Net of returns and allowances, for 1994 and 1995.
2
Mid-Del originally reported its income for 1993 using an accrual method of
accounting. During an audit of its 1993 Federal income tax return, Mid-Del submitted
an amended return reporting its income and expenses for 1993 using the cash method of
accounting. The audit was closed by agreement using the figures reflected on the
amended return.
The combined average annual gross receipts of both
petitioners for the 3 years ending with the taxable years in
issue was less than 5 million dollars.
For accounting purposes, Mid-Del and PC each valued their
chemotherapy drugs and miscellaneous medications at actual cost.
As of taxable years ending April 30, 1994, and April 30, 1995,
PC's drugs on hand were valued at $44,593 and $42,143,
respectively. As of December 31, 1994, 1995, and 1996, Mid-Del's
drugs on hand were valued at $37,273, $60,382, and $67,634,
respectively.
Neither petitioner made any attempt to manipulate income or
expenses by deferring income or paying unnecessary expenses at
the end of the taxable year.
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The Notices of Deficiency
Following an audit, respondent issued notices of deficiency
to each of the petitioners in which respondent determined that
they must use the accrual method. The notices of deficiency
described respondent’s determination as follows: “It is
determined the accrual method of accounting more clearly reflects
income than your current ‘Cash Basis’ method of accounting.”
OPINION
Section 446(b) vests the Commissioner with broad discretion
in determining whether a particular method of accounting clearly
reflects income. See Knight-Ridder Newspapers, Inc. v. United
States, 743 F.2d 781, 788 (11th Cir. 1984); Ansley-Sheppard-
Burgess Co. v. Commissioner, 104 T.C. 367, 370 (1995); RLC Indus.
Co. v. Commissioner, 98 T.C. 457, 491 (1992), affd. 58 F.3d 413
(9th Cir. 1995). The Commissioner's determination is entitled to
more than the usual presumption of correctness. See Ansley-
Sheppard-Burgess Co. v. Commissioner, supra; RLC Indus. Co. v.
Commissioner, supra. Accordingly, the Commissioner's
interpretation of the "clear-reflection standard [of section
446(b)] 'should not be interfered with unless clearly unlawful.'"
Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532 (1979)
(quoting Lucas v. American Code Co., 280 U.S. 445, 449 (1930)).
The taxpayer bears "a 'heavy burden of * * * [proof],'" and the
Commissioner's determination "is not to be set aside unless shown
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to be 'plainly arbitrary.'" Id. at 532-533 (quoting Lucas v.
Kansas City Structural Steel Co., 281 U.S. 264, 271 (1930)).
The Commissioner's determination that a taxpayer's method of
accounting does not clearly reflect its income is given great
deference by this Court, but the Commissioner may not require a
taxpayer to change from an accounting method which clearly
reflects income to an alternate method of accounting merely
because the Commissioner considers the alternate method to more
clearly reflect the taxpayer's income. See Ansley-Sheppard-
Burgess Co. v. Commissioner, supra at 371.
The issue of whether the taxpayer's method of accounting
clearly reflects income is a question of fact to be determined on
a case-by-case basis. See id. In reviewing the Commissioner's
determination that the taxpayer's method of accounting does not
clearly reflect income, the function of the Court is to determine
whether there is an adequate basis in law for the Commissioner's
conclusion. See RCA Corp. v. United States, 664 F.2d 881, 886
(2d Cir. 1981). Consequently, to prevail, a taxpayer must prove
that the Commissioner's determination was arbitrary, capricious
or without sound basis in fact or law. See Knight-Ridder
Newspapers, Inc. v. United States, supra; Ansley-Sheppard-Burgess
Co. v. Commissioner, supra.
Sec. 471(a) provides:
SEC. 471. GENERAL RULE FOR INVENTORIES.
(a) General Rule.--Whenever in the opinion of the
Secretary the use of inventories is necessary in order
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clearly to determine the income of any taxpayer,
inventories shall be taken by such taxpayer on such
basis as the Secretary may prescribe as conforming as
nearly as may be to the best accounting practice in the
trade or business and as most clearly reflecting the
income.
By regulation, the Secretary has determined that inventories are
necessary in every case in which the production, purchase, or
sale of merchandise is an income-producing factor in the
taxpayer's business. See sec. 1.471-1, Income Tax Regs. Unless
otherwise authorized by the Commissioner, a taxpayer who is
required to maintain inventories must use an accrual method of
accounting with regard to purchases and sales of inventory. See
Asphalt Prods. Co. v. Commissioner, 796 F.2d 843, 849 (6th Cir.
1986), affg. in part and revg. in part Akers v. Commissioner,
T.C. Memo. 1984-208, revd. on another issue 482 U.S. 117 (1987);
sec. 1.446-1(c)(2)(i), Income Tax Regs.
Respondent argues that the drugs at issue in this case are
merchandise, the purchase and sale of which are income-producing
factors in petitioners’ businesses, and, therefore, petitioners
are required to use the accrual method of accounting to report
their taxable income.6 Petitioners take exception to respondent's
characterization of the drugs, countering that the drugs are
supplies used in the course of treating patients, with the result
6
Respondent does not argue in this case that Mid-Del failed
to satisfy the book consistency requirement. See sec. 446(a).
Respondent’s arguments are directed solely to whether Mid-Del had
inventories within the meaning of sec. 471.
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that, under their view, the regulations requiring use of the
accrual method are inapplicable. We agree with petitioners that
their drugs are not merchandise.
The term "merchandise" as used in section 1.471-1, Income
Tax Regs., encompasses goods purchased in condition for sale,
goods awaiting sale, articles of commerce held for sale, and all
classes of commodities held for sale. See Wilkinson-Beane, Inc.
v. Commissioner, 420 F.2d 352, 354-355 (1st Cir. 1970), affg.
T.C. Memo. 1969-79. Thus, items are merchandise if held for
sale. See id.
We recently held in a Court-reviewed opinion that
chemotherapy and other drugs, when used in the course of treating
patients, are not held for sale and, therefore, are not
merchandise. See Osteopathic Med. Oncology & Hematology, P.C. v.
Commissioner, 113 T.C. 376 (1999). In Osteopathic Med. Oncology
& Hematology, P.C., our holding was premised on our conclusion
that the chemotherapy drugs and ancillary medications were both
inseparable from the medical services provided to patients by the
taxpayer and subordinate to the medical services provided. See
id. at 384-385.
As in Osteopathic Med. Oncology & Hematology, P.C., the
furnishing of drugs and other medical supplies in this case is
inseparable from and subordinate to the medical services provided
by petitioners to their patients. See id. Patients come to the
clinics to receive medical treatment from Dr. Ishmael, not to
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purchase drugs per se. The drugs are administered to patients
during the course of their treatment. At no point during the
treatment process does a patient acquire title to the drugs or
exercise control over them. A patient does not direct how or
when the drugs are administered, nor can a patient simply
purchase the drugs for self-treatment. Upon completion of each
treatment, there is nothing left for a patient to acquire, sell,
or otherwise exert ownership rights over. Although there are
some factual differences between this case and Osteopathic Med.
Oncology & Hematology, P.C., the key operational facts for
purposes of our determination of whether petitioners’
chemotherapy drugs constitute merchandise are virtually
identical. We hold that this case is controlled by Osteopathic
Med. Oncology & Hematology, P.C. and that, therefore, for
purposes of section 1.471-1, Income Tax Regs., petitioners’
chemotherapy drugs are not merchandise.
Respondent's determinations in the notices of deficiency
regarding petitioners’ use of the accrual method do not state
that the determinations were premised on respondent’s conclusion
that the chemotherapy drugs are merchandise.7 On brief, however,
7
Other than respondent’s argument that the drugs used by
petitioners are inventory requiring use of the accrual method,
respondent has not posited any reason why petitioners' use of the
cash method does not clearly reflect income. In fact,
respondent’s determination in the notices of deficiency in this
case, read literally, is only that the accrual method “more
clearly reflects income than your current ‘Cash Basis’ method of
accounting.” Implicit in respondent’s determination as phrased
(continued...)
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respondent’s argument as to why petitioners are required to use
the accrual method is based solely on his position that the drugs
used by petitioners are merchandise that must be inventoried.
Respondent does not dispute that petitioners’ use of the cash
method clearly reflects income to the extent that the drugs are
not merchandise. Because we hold that petitioners' drugs are not
merchandise, it follows that petitioners are neither required to
maintain inventories with respect to their drugs by section
1.471-1, Income Tax Regs., nor required to use an accrual method
by section 1.446-1(c)(2)(i), Income Tax Regs. See Osteopathic
Med. Oncology & Hematology, P.C. v. Commissioner, supra at 391-
392.
We hold, therefore, that respondent abused his discretion
in requiring petitioners to change from the cash method of
accounting to an accrual method.
7
(...continued)
is the recognition that petitioners’ cash method of accounting
does reflect their income clearly, albeit not as clearly as the
accrual method. Although the language used in respondent’s
notices of deficiency may be nothing more than a verbal foot-
fault, or an ill-phrased attempt to summarize the requirements of
sec. 471(a), respondent has offered no evidence to explain why
the determinations were phrased as stated in the notices.
Although the Commissioner’s determination that a taxpayer’s
method of accounting does not clearly reflect its income is
entitled to great deference, the Commissioner may not require a
taxpayer to change from a method of accounting that clearly
reflects income to another method of accounting because the
Commissioner determines that the alternate method will reflect
the taxpayer’s income more clearly. See Ansley-Sheppard-Burgess
Co. v. Commissioner, 104 T.C. 367, 371 (1995).
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In light of our holding, we find it unnecessary to address
petitioners' additional assignments of error.8 We have carefully
considered all remaining arguments made by respondent for a
result contrary to that expressed herein, and to the extent not
discussed above, we find them to be irrelevant or without merit.
To reflect the foregoing,
Decisions will be entered
for petitioners.
8
On brief, petitioners made several additional arguments in
support of their contention that respondent abused his
discretion. Petitioners argued that the cash method clearly
reflected their income, irrespective of whether inventories were
required by sec. 1.471-1, Income Tax Regs.; that an audit of Mid-
Del’s 1993 Form 1120 resulted in an authorization for Mid-Del
(and PC, by implication) to use the cash method; that sec. 448
permitted petitioners' continued use of the cash method, also
irrespective of whether merchandise inventories were required;
and finally, that computational errors were made in the sec. 481
adjustment.