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taxable year. On Forms 1120 filed for HPI's 1986 and 1987
taxable years and HDI's 1987 taxable year, Curtis also reduced
its cost of goods sold by the amount of the credits that it was
entitled to receive and in due course did receive from the
magazine publishers with respect to the returned magazines.
These correlative cost adjustments were in accordance with
section 1.458-1(g), Proposed Income Tax Regs., 49 Fed. Reg. 34523
(Aug. 31, 1984) (the Regulation). In early 1989 Curtis learned
that the Government had conceded a refund action involving
another taxpayer's attempt to make the section 458 election
without offsetting cost adjustments. In reliance upon this
concession, Curtis filed a Federal income tax return, Form 1120X,
Amended U.S. Corporation Income Tax Return (Form 1120X), for
HPI's 1986 and 1987 taxable years and HDI's 1987 taxable year
covered by its section 458 election, on which it recomputed the
amount of the gross income exclusion without regard to the
requirements of the Regulation and claimed refunds for
overpayment of tax and interest. With respect to HPI's 1987
taxable year, respondent refunded the full amount claimed, but
she has not allowed the claim with respect to the HDI 1987
taxable year.
On Form 1120 for HDI's 1988 taxable year Curtis computed the
exclusion for returned merchandise without offsetting adjustments
for the credits it was entitled to receive from its suppliers.
On April 13, 1994, respondent timely mailed notices of deficiency
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