Ohio Periodical Distributors, Inc., f.k.a. Scott Krauss News Agency, Inc., Ronald E. Scherer Trust and Linda S. Hayner Trust, Persons Other Than the Tax Matters Person - Page 6

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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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