Hachette USA, Inc., As Successor to Hachette Publications, Inc. and Curtis Circulation Co., Subsidiary - Page 11

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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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