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close of the merchandise return period." Section 458(b)(6)
defines the amount excluded from gross income as "the lesser of
* * * the amount covered by the legal obligation described in
paragraph (5)(A), or * * * the amount of the adjustment agreed to
by the taxpayer before the close of the merchandise return
period." The legal obligation of paragraph (5)(A) is the
obligation of the taxpayer to adjust the sales price of the
magazine, paperback, or record if it is not resold. Section
1.458-1(g), Income Tax Regs., contains the formula for
determining excludable gross income. It states:
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 section 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.
Id.
The identical issue of the validity of section 1.458-1(g),
Income Tax Regs., was raised in Hachette USA, Inc. v.
Commissioner, 105 T.C. , (1995). Petitioners' counsel in
this case was also counsel in Hachette. Petitioners' briefs in
both cases presented identical arguments. In fact, the 30 pages
of brief in this case that address the validity of the regulation
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