Hachette USA, Inc., As Successor to Hachette Publications, Inc. and Curtis Circulation Co., Subsidiary - Page 8

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                    The generally accepted method of accounting for                   
               returns in the publishing industry is to record sales                  
               at the time merchandise is shipped and to establish an                 
               offsetting reserve for estimated returns.  The effect                  
               of this accounting treatment is to report sales net of                 
               estimated returns.  Tax accounting rules, however, do                  
               not permit gross income to be reduced for returns until                
               the returned items are received, which may not occur                   
               until a taxable year subsequent to that in which the                   
               sale was recorded.                                                     
                    The committee believes that the present method of                 
               tax accounting for returns of magazines, paperbacks,                   
               and records does not accurately measure income for                     
               Federal income tax purposes and that it adversely                      
               affects publishers and distributors of these items.                    
               [S. Rept. 95-1278, at 4 (1978).]                                       
               The basic formula of section 458 was already developed in              
          the 93d Congress in a provision that the House Ways and Means               
          Committee included in its unreported tax reform bill of 1974.  An           
          identical provision was reported by the Committee in the 94th               
          Congress as H.R. 5161 and was passed by voice vote of the House             
          of Representatives in 1976.  Miscellaneous Tax Bills:  Hearings             
          Before the Subcommittee on Miscellaneous Revenue Measures of the            
          House Ways and Means Committee, 95th Cong., 1st Sess. 218 (Sept.            
          7 and 9, 1977) (hereinafter Ways and Means Committee Hearings).             
          The provision would have allowed accrual basis publishers and               
          distributors of periodicals to elect not to include sales income            
          attributable to copies sold for display purposes which are                  
          returned within 2-1/2 months after the close of the tax year.  A            
          sale for display purposes was defined as a sale which was made in           
          order to permit adequate display of the periodical, if at the               
          time of the sale the taxpayer had a legal obligation to accept              




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