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Petitioner reads section 1.471-3(b), Income Tax Regs.,
beyond its proper scope.8 As confirmed by a later portion of the
regulation, the import of section 1.471-3(b), Income Tax Regs.,
is that a taxpayer's inventory cost includes only the net amount
paid by the taxpayer for goods that the taxpayer has acquired:
“To this net invoice price should be added transportation or
other necessary charges incurred in acquiring possession of the
goods.” Sec. 1.471-3(b), Income Tax Regs. (emphasis added).
Accordingly, the “discount” to which section 1.471-3(b), Income
Tax Regs., refers arises contemporaneously with the purchase of
specific goods as inventory and is subtracted from their invoice
price to determine their cost. The term does not include cash
payments that the seller or manufacturer of goods paid to Westpac
in exchange for Westpac's agreement to purchase goods from the
same vendor in the indefinite future and to not purchase
competing brands from other suppliers. Cf. Harkins v.
Commissioner, T.C. Memo. 2001-100. Based on the evidence,
petitioner has failed to show that Westpac received the payments
concurrently with its purchase of specific goods in inventory and
that they are properly allocable as trade discounts off the
8 Petitioner's argument under this regulation is further
undermined by the fact that Westpac failed to account for what it
considered to be the earned portions of the advance trade
discounts as reductions to its cost of goods sold on its 1990
income tax return.
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