- 10 -
that year which to offset.5 In 1991, Westpac reported what it
considered to be the earned portions of the upfront cash payments
received on the McCormick and American Greetings contracts as a
reduction to its cost of goods sold. Westpac intended to treat
similarly the deemed earned portions of the upfront cash payments
received on the Ambassador and GTE Sylvania contracts as
reductions to its cost of goods sold, but its income tax preparer
mistakenly continued the “other income” treatment for these
amounts from the prior year's tax return.
The chart below summarizes the upfront cash payments that
Westpac received in the years in issue as well as the portion of
such payments Westpac recognized as income for tax purposes
during those years:
Cash Payments Income Recognized
Contract 1990 1991 1990 1991
McCormick -0- $4,801,000 -0- $571,628
Ambassador $4,572,000 -0- $119,878 329,705
American Greetings -0- 1,250,000 -0- 293,102
GTE Sylvania 1,100,000 200,000 87,947 87,862
Total 5,672,000 6,251,000 207,825 1,282,297
Respondent determined Westpac was required to include in income
the full amount of the upfront cash payments in the taxable year
in which such payments were received.6
5 During 1990, Westpac's warehouse operation had not been
completed, and therefore all purchases under the Ambassador and
GTE Sylvania contracts were made directly by Westpac's partners.
6 Westpac received certain payments under a contract which
it entered into with Phillip Morris, Inc., and the parties have
(continued...)
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