- 57 -
Having decided that the second warrant constituted a trade
discount, we next consider how the discount is to be taken into
account in computing petitioners’ taxable income. As a general
matter for tax purposes, where a trade discount is obtained with
respect to goods the cost of which has been included in a
taxpayer’s cost of goods sold, the discount is treated as an item
of gross income. If, however, the discount relates to goods the
cost of which is still in a taxpayer’s inventory, the cost of the
goods is reduced by the amount of the discount. See Turtle Wax,
Inc. v. Commissioner, 43 T.C. 460, 466 (1965). The parties have
not addressed whether, in the event we decide that the second
warrant constitutes a trade discount, the discount should be
treated as a reduction in the cost of goods in CV’s inventory or
as an item of gross income. In their return for 1987,
petitioners treated a portion of the net proceeds of the sale of
the second warrant as a reduction of CV’s cost of goods sold,
21(...continued)
return, the treatment of the net sale proceeds in petitioners’
return was correct. Petitioners, on brief, contend that the full
amount of the net proceeds of the sale of the second warrant is
long-term capital gain and that the appropriate time for
recognition is the time at which the second warrant was sold.
Petitioners do not attempt to sustain their return position in
that regard, and we treat petitioners as not disputing
respondent’s determination of the appropriate time for
recognition of the discount attributable to the second warrant.
We note that we have recently ruled that the amount of a seller’s
deduction for a trade discount attributable to the grant of a
stock warrant is to be determined as of the time the warrant is
exercised. Convergent Technologies, Inc. v. Commissioner, T.C.
Memo. 1995-320.
Page: Previous 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 NextLast modified: May 25, 2011