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the corporation under section 4581, resulting in the exclusion
from gross income of the amount of the corporation's income
attributable to returns from "qualified" sales of magazines and
paperbacks, requires the making of a corresponding adjustment to
cost of goods sold pursuant to section 1.458-1(g), Income Tax
Regs. More specifically at issue is the validity of section
1.458-1(g), Income Tax Regs., which, if valid, would without
dispute require a decision against petitioner.
Ohio Periodical Distributors, Inc. ("Ohio Periodical" or
"the corporation") has been operating as an S corporation in Ohio
since 1984. At all times relevant, the corporation prepared its
Federal income tax returns using the accrual method of
accounting. It was a wholesale distributor of magazines and
paperback books. Its customers were bookstores and other
businesses engaged in the retail sale of such merchandise to the
public.
At all times relevant, in accordance with industry practice,
Ohio Periodical sold more copies of paperbacks and magazines to
its customers than it expected the customers to resell. The
corporation nevertheless billed its customers for the full number
of copies thus sold to them. However, in accordance with
industry practice, the customers had the legal right to receive
1 Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue.
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Last modified: May 25, 2011