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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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