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individually or in the aggregate, because petitioner saw no need
to keep a record of such amounts. In petitioner’s view, they were
irrelevant for both financial and tax reporting purposes.
Petitioner, therefore, concludes that respondent’s proposed
reversal of petitioner’s royalty expense deductions, by focusing
on the financial statement royalty reserve, necessarily focuses on
an incorrect amount.
Respondent responds that the alleged difference between the
financial statement royalty reserve and the amounts actually
withheld from authors "cannot be readily corroborated one way or
the other",5 and that petitioner has not "adduced any specifics to
establish the extent to which * * * [the two amounts] may have
differed". Respondent also argues that "[u]nless * * *
[petitioner] wishes to admit that its financial statements are
grossly unreliable, [petitioner’s] adjustments to the royalty
reserves should be considered reasonably accurate as to the
overall expense deduction at issue." It is apparently on that
basis, and on the basis that respondent views any difference
between the two amounts as "irrelevant to the resolution of the
legal issue", that respondent justifies his proposed increase in
petitioner’s income for the audit years by the amount of the
5 Petitioner’s position is based upon affidavits filed by
the former general counsel and the former chief financial officer
of Random House.
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Last modified: May 25, 2011