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section 1.458-1, Income Tax Regs., remained essentially identical
in the final version. They provide:
(c) Amount of the exclusion -- (1) In general. Except
as otherwise provided in paragraph (g) of this section,
the amount of the gross income exclusion with respect
to any qualified sale is equal to the lesser of --
(i) [same as section 458(b)(6)(A)]
(ii) [same as section 458(b)(6)(B)]
* * * * * * *
(g) Adjustment to inventory and cost of goods sold.
(1) If a taxpayer makes adjustments to gross receipts
for a taxable year under the method of accounting
described in section 458, the taxpayer, in determining
excludable gross income, is also required to make
appropriate correlative adjustments to purchases or
closing inventory and to cost of goods sold for the
same taxable year. Adjustments are appropriate, for
example, where the taxpayer holds the merchandise
returned for resale or where the taxpayer is entitled
to receive a price adjustment from the person or entity
that sold the merchandise to the taxpayer. Cost of
goods sold must be properly adjusted in accordance with
the provisions of sec. 1.61-3 which provides, in
pertinent part, that gross income derived from a
manufacturing or merchandising business equals total
sales less cost of goods sold.
The correlative adjustments contemplated by the Regulation are
illustrated by examples in subparagraph 2. In Example 1, which
we shall adapt somewhat for the purposes of our discussion,
publisher sells 500 copies of its publication to distributor at
$1 each in year 1. Under the sale agreement publisher has an
obligation to refund to distributor the full sales price for any
copies which distributor does not resell and returns, or from
which distributor removes and returns the cover, during the
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