§471 — General rule for inventories

Unlike most businesses, drug traffickers can't capitalize indirect expenses beyond what's listed in the section 471 regulations.

Unlike most businesses, drug traffickers can't capitalize indirect expenses beyond what's listed in the section 471 regulations.

Unlike most businesses, drug traffickers can't capitalize indirect expenses beyond what's listed in the section 471 regulations.

471(2)(B), 112 Stat. 1729, deleted the phrase “except that the amount may not be less than $2,500”, effective for tax years beginning after Dec. 31, 2001. This amendment, however, does not apply in the instant case.

376 (1999), Is Factually Distinguishable From the Circumstances in This Case--Osteopathic Med.

The reported authorities, including those cases where the court found that the merchandise at issue there was sold either with or without a service, are all materially distinguishable from the facts herein given the uniqueness of the service provided.

Unlike the case before us, the Redwing Carriers, Inc., supra, case did not involve the inventory accounting issue under section 471 that is presented here.

Petitioner argues that its accounting complied with industry standards and the write- downs should be allowed.7 We disagree with petitioner.

After concessions,¹ the issues for our consideration are whether: (1) Richmond is entitled to additional costs ofgoods sold (COGS) or deductions for business expenses other than those respondent allowed; (2) Richmond was a reseller or a producer ofmarijuana pursuant to section 471 during the years in issue; (3) Richmond is allowed to change its accounting method pursuant to section 446 for tax year 2015; and (4) Richmond is liable for accuracy-related penalties pursuant to section 6662(a).

The parties agree that some ofpetitioners' wages are not COGS pursuant to section 471 and section 1.471-11, Income Tax Regs.

471 provides the general rule for inventories.

Section 471 provides that inventories shall be taken on such basis as the Secretary prescribes and establishes "two distinct tests to which an inventory must conform.

Respondent calculated the additional section 263A capitalizable costs as the product of the combined absorption ratio and petitioner’s purported section 471 costs at the end of the year.

Despite the broad language of section 471, the Secretary’s discretion to require inventory accounting is not unlimited.

spondent’s discretion to exercise his authority under section 446 and require petitioner to change from the cash method to a hybrid method. Presented is the question of whether petitioner should be required to keep inventories for tax purposes under section 471. Respondent determined that petitioner’s chemotherapy drugs were merchandise that was an income-producing factor, that petitioner therefore was required to inventory the drugs, and that petitioner was required to use an accrual method to

determining that Consolidated’s method of valuing certain raw materials does not clearly reflect income because it did not reflect the proper amounts for those raw materials under the FIFO inventory method and the LCM basis of valuation permitted by section 471? We hold that respondent did not. FINDINGS OF FACT Most of the facts have been stipulated and are so found. Consolidated, an S corporation, had its principal place of business in Hutchinson, Kansas, at the time the petition was filed. The

471 provides in pertinent part: SEC. 471(a). General Rule.--Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of (continued...) - 7 - A taxpayer that has inventories is required to use the accrual method, unless it can show that use of another method (here, the cash method) w

COGS is generally determined under section 471 and the accompanying regulations.

COGS is generally determined under section 471 and the accompanying regulations.

COGS is generally determined under section 471 and the accompanying regulations.

Inventory Write-Downs Section 471 provides that a taxpayer should use a method of accounting for inventory as prescribed by the Secretary that clearly reflects the taxpayer’s income.

Petitioner looks to the regulations promulgated under section 471 to support its argument.

patients, with the result 6Respondent 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. - 19 - 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., encompa

If a taxpayer must use inventories, the Commissioner has broad latitude pursuant to section 471 and the regulations - 13 - thereunder to determine that the cash method of accounting does not clearly reflect the taxpayer's income.

If a taxpayer must use inventories, the Commissioner has broad latitude pursuant to section 471 and the regulations - 13 - thereunder to determine that the cash method of accounting does not clearly reflect the taxpayer's income.

1.446-1(c)(2)(i), Income Tax Regs.3 2 Sec. 471 provides in pertinent part: SEC. 471(a). General Rule.--Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conf

- 9 - Pursuant to section 471,5 a taxpayer that has inventories is required to use the accrual method of accounting.

Section 471 prescribes the general rule for inventories. The - 30 - regulations thereunder follow the statutory text in stating that a method of accounting for inventory "must conform as nearly as may be to the best accounting practice in the trade or business," and "must clearly reflect the income." Sec. 1.471-2(a)(1) and (2), Income Tax Regs. Se

The Board noted that Congress did not intend, by the predecessor of section 471 (section 203 of the Revenue Act of 1918, ch.

), respondent determined a deficiency in the taxpayer’s Federal income tax because, in computing its yearend book (...continued) 100 Stat. 2356, designated the quoted language as sec. 471(a). Before amendment, the quoted language was the entirety of sec. 471. - 17 - inventories, the taxpayer made a shrinkage accrual. In the Dayton Hudson case, which was before us on the Commissioner’s motion for summary judgment, we held that section 1.471-2(d), Income Tax Regs., as a matter of law, does not pro

Dollar-Value LIFO Section 471 requires the use of inventories whenever necessary in order to clearly reflect income.

y be to the best accounting practice in the trade or business, and (2) It must clearly reflect the income.” The Supreme Court has remarked that “best accounting practice” is synonymous with “generally accepted accounting principles” (GAAP) and that section 471 “vest[s] the Commissioner with wide discretion in determining whether a particular method of inventory accounting should be disallowed as not clearly reflective of income.” Thor Power Tool Co.

See § 471 (requiring taxpayers that sell merchandise to use inventory accounting); Treas. Reg. § 1.446-1(c)(2)(i). Furthermore, the record establishes that HPPO included the entire sale price from a sale made on credit in its gross receipts in the year of sale; the record does not establish that HPPO had unreported, accrued income that required an acco

COGS is generally determined under section 471 and its accompanying Treasury regulations.

a broader discussion of temporary legislation, see Jacob E. Gersen, Temporary Legislation, 74 U. Chi. L. Rev. 247 (2007). 6 Significant amendments included, among others, those made by the Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, §§ 471, 474(i), 98 Stat. 494, 825– 26, 831–32, the Tax Reform Act of 1986 (TRA 1986), Pub. L. No. 99-514, § 231, 100 Stat. 2085, 2173–80, the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), Pub. L. No. 101-239, § 7110, 103 Stat. 2106, 2322–26,

After concessions, the sole issue for consideration is whether tax depreciation methods for inventory production assets can be used under either section 263A or section 471 when section 280E is applied.1 1 The parties have stipulated the amounts needed to compute a deduction pursuant to section 199.

It is “the costs of acquiring inventory, through either purchase or production”, which are generally determined under section 471 and the accompanying regulations.

Cost of goods sold generally is determined under section 471 and the accompanying regulations.

Cost of goods sold generally is determined under section 471 and the accompanying regulations.

COGS COGS is computed under section 471.¹5 During the audit, the Commissioner measured Mr.

Generally speaking, a taxpayer must account for inventories under section 471 for any trade or business "in which the production, purchase, or sale of merchandise is an income-producing factor." Sec.

COGS is generally determined under section 471 and the accompanying regulations.

COGS is generally determined under section 471 and the accompanying regulations.

COGS is generally determined under section 471 and the accompanying regulations.

COGS is determined under section 471 and the accompanying regulations.

COGS is determined under section 471 and the accompanying regulations.

oss deduction is not allowed for, "losses sustained upon the sale or exchange ofproperty, losses sustained upon the obsolescence or worthlessness ofdepreciable property, casualty losses, or losses reflected in inventories required to be taken under section 471." Sec. 1.165-2(b), Income Tax Regs. Consequently, GK Co-op's claimed abandonment loss is disallowed by section 1.165-2(b), Income Tax Regs., because the loss from the surrender ofthe Securities is deemed to be a loss from a sale or exchang

ss deduction is not allowed for, “losses sustained upon the sale or exchange of property, losses sustained upon the obsolescence or worthlessness of depreciable property, casualty losses, or losses reflected in inventories required to be taken under section 471.” Sec. 1.165-2(b), Income Tax Regs. Consequently, GK Co-op’s claimed abandonment loss is disallowed by section 1.165-2(b), Income Tax Regs., because the loss from the surrender of the Securities is deemed to be a loss from a sale or excha

Section 471 generally prohibits . the use of inventory accounting for property other than merchandise . Homes by Ayres v. Commissioner, 795 F .2d 832, 836 (9th Cir . 1986), affg. T .C. Memo . 1984-475 . Property other than merchandise may be inventoried only if the regulations under section 471 expressly provide for invento'r'y.: account-ing;'or->

onsidered consumed and used in the year in which the taxpayer sells the merchandise or finished goods. See Rev. 15The IRS will not challenge a taxpayer’s use of the cash method under sec. 446, or a taxpayer’s failure to account for inventories under sec. 471, in a tax year ending before Dec. 17, 1999, if the taxpayer would satisfy the 3-tax-year-period gross receipts test of Rev. Proc. 2001-10, sec. 5.01, 2001-1 C.B. 272, 273. Id. sec 8., 2001-1 C.B. at 275. - 17 - Proc. 2001-10, sec. 4.02, 2001

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 merchandis

- 18 - * * * * * * * (3) LIFO recapture amount.–-For purposes of this subsection, the term “LIFO recapture amount” means the amount (if any) by which–- (A) the inventory amount of the inventory asset under the first-in, first-out method authorized by section 471, exceeds (B) the inventory amount of such assets under the LIFO method.

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 - 9 - 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 material is me

— For purposes of this subsection, the term “LIFO recapture amount” means the amount (if any) by which— (A) the inventory amount of the inventory asset under the first-in, first-out method authorized by section 471, exceeds (B) the inventory amount of such assets under the LIFO method.

No. 16350-95. ' Filed March 2, 1999. Company M (M), a heavy truck dealer, purchased heavy truck parts and accessories (parts) from the manufacturers of those parts and sold them to its customers. M, which is required to use inventories pursuant to sec. 471, I.R.C., made elections under sec. 472, I.R.C., effective as of the close of its taxable year 1980, to apply the last-in, first-out (LIFO) method of inventory accounting (LIFO method) with respect to its parts inventory, to use the dollar-val

OPINION The issues presented implicate not only section 472, entitled “Last-In, First-Out Inventories”, but also section 446, entitled “General Rule for Methods of Accounting”, and section 471, entitled “General Rule for Inventories”.

Respondent's Method of Valuing Petitioner's Inventory Was Improper Rules governing the valuation of inventories are set forth in regulations promulgated under section 471 and the uniform - 14 - capitalization rules of section 263A.

s the taxpayer shows that such failure was due to reasonable cause 7Sec. 1236 itself contains no definition of a securities dealer. However, the regulations thereunder, at sec. 1.1236- 1(c)(2), Income Tax Regs., cross-reference the regulations under sec. 471 for a definition of a dealer in securities. The latter regulations, like Kemon v. Commissioner, 16 T.C. 1026 (1951), use a merchant analogy and require an "established place of business." See sec. 1.471-5, Income Tax Regs. To the extent this

ods on hand. The balances shown by such book inventories should be 2 The Tax Reform Act of 1986, Pub. L. 99-514, sec. 803(b)(4), 100 Stat. 2356, designated the quoted language as sec. 471(a). Before amendment, the quoted language was the entirety of sec. 471. - 18 - verified by physical inventories at reasonable intervals and adjusted to conform therewith. III. Prior Proceedings Previously, on respondent's motion for summary judgment, we addressed one of the issues presented in this case. In Day

Respondent contends, on the other hand, that section 471 does not require that merchandise be sold, only that it be purchased and then used in some way to produce income.

Respondent contends, on the other hand, that section 471 does not require that merchandise be sold, only that it be purchased and then used in some way to produce income.

As the regulations point out, section 471 obviously establishes two distinct tests to which an inventory must conform: (1) It must conform as nearly as may be to the best accounting practice in the trade or business, and (2) It must clearly reflect the income.