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election to exclude the income attributable to returned
merchandise. "If the statute stopped there, the question of how
to determine 'the income attributable to' the returned items of
merchandise might well be a proper subject for further
elaboration in regulations. The statute does not, however, stop
there." Rather, in section 458(b)(6) it provides an explicit and
unambiguous formula for determining the adjustment to income.
The adjustment specified by Congress is the amount of the credit
against sales price which the taxpayer is obligated to grant to
the purchaser; the language of section 458(b)(6) leaves no room
whatever for interpretation. Nevertheless, the regulations
substitute their own formula for the formula specified by
Congress. The formula for determining the "gross income
exclusion" under section 1.458-1, Income Tax Regs., is the same
as that for determining the statutory "amount excluded", "except
as otherwise provided in paragraph (g)". Sec. 1.458-1(c), Income
Tax Regs. (emphasis added). The offsetting cost adjustments
required by paragraph (g) have the effect of "transform[ing] the
'amount excluded' from the amount of the credit given the
retailers for returned items to an amount equal to the
distributor's gross profit on those items." The Regulation does
not validly interpret the statute; it changes the statute.
Petitioners' argument succeeds in demonstrating that the net
effect of the cost adjustments required by the Regulation is to
reduce gross income by the amount of the gross profit on returned
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