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statutory merchandise return period in year 2. Distributor
returns the covers from 100 copies within the merchandise return
period. Publisher's cost is 25 cents per copy.
In the absence of a section 458 election, publisher would
compute its gross income for year 1 ($375) by taking the
difference between sales revenues ($500) and cost of goods sold
($125). Pursuant to section 458, publisher is entitled to
exclude $100 from gross income. Under these facts, no cost of
goods sold adjustment is required because publisher does not hold
the "returned" merchandise for resale. Accordingly, its gross
income is $275 ($400 - $125). By contrast, if distributor
returned unsold copies intact and publisher held them for resale
to other customers, the Regulation would require publisher to
compute its gross income ($300) as follows: gross receipts
adjusted for the exclusion ($500 - $100) less cost of goods sold
adjusted for the addition to closing inventory ($125 - $25).
As Example 2 makes clear, if distributor resold the
publications to retailer under a similar right-of-return
arrangement, in no case would distributor be entitled to exclude
the sales proceeds attributable to copies returned by retailer
unless distributor reduced its cost of goods sold. This is
because, unlike publisher in the first variant of Example 1,
distributor's costs are fully reimbursed.
The preamble to the final regulations acknowledged that
during the period for public comment on the proposed regulations
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