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merchandise (what the regulations call "gross income exclusion"
or "excludable gross income"), which amount is less than the full
sales price adjustment (the statutory "amount excluded"). But
this proposition was not in dispute. Respondent concedes it, and
it is openly acknowledged in paragraphs (c) and (g) of the
regulations themselves.
On the other hand, petitioners' conclusion that the
Regulation is inconsistent with the statute does not necessarily
follow. There is no inconsistency unless the statute precludes
any further adjustment in the computation of gross income. It is
the express premise of the Regulation that the statute has no
such effect, because it purports to deal only with the method of
accounting for gross receipts. The argument outlined above does
not even challenge this premise, let alone persuade us that it is
wrong.
The approach of the Regulation proceeds from the fundamental
principle that the determination of gross income by a taxpayer
who uses inventory comprises two separate calculations:
inclusion of gross receipts and subtraction of cost of goods
sold. Sec. 1.61-3(a), Income Tax Regs. Within this analytical
framework it makes no sense to say that rules prescribing the
treatment of costs "change" the determination of includable
receipts. There is no question that the cost of goods sold
adjustment provided for by the Regulation operates to offset, in
whole or in part, the exclusion provided for by the statute. But
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