Hachette USA, Inc., As Successor to Hachette Publications, Inc. and Curtis Circulation Co., Subsidiary - Page 4

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          and deductions for the 6-month period ended June 30, 1987, were             
          included on Form 1120 filed by HPI for HPI's 1987 taxable year.             
               On June 30, 1987, HPI transferred all of its stock in Curtis           
          to Hachette Distribution, Inc., a Delaware corporation (HDI).               
          Curtis' income and deductions for the 6-month period ended                  
          December 31, 1987, and for the 11-month period ended November 30,           
          1988, were included on Forms 1120 filed by HDI for HDI's 1987 and           
          1988 taxable years, respectively.  In a merger consummated on               
          November 30, 1988, Hachette USA, succeeded to all the assets,               
          claims, debts, and liabilities of HPI and HDI.                              
               At all times relevant to these cases, Curtis was a national            
          wholesale distributor of magazines.  Its customers were local or            
          regional distributors who sold the magazines acquired from Curtis           
          to retail merchants.  In accordance with established industry               
          practice Curtis billed its customers for the full number of                 
          copies that it shipped to them, but granted them the legal right            
          to receive full credit for copies of magazines that they were               
          unable to sell.  Curtis, in turn, was entitled to receive full              
          credit from the magazine publishers for these unsold copies.                
          Thus, the financial risk associated with returned merchandise was           
          ultimately and solely borne by Curtis' suppliers.                           
               In computing its income for the taxable years in issue                 
          Curtis properly elected under section 458 to exclude from gross             
          income the full amount of the sale price of copies returned by              
          its customers within the first 2-1/2 months of the following                




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