Magazine article The CPA Journal

Manufacturer's Sale Inventory Held Not Bona Fide

Magazine article The CPA Journal

Manufacturer's Sale Inventory Held Not Bona Fide

Article excerpt

A manufacturer of construction and other types of equipment entered into contracts transferring excess inventory to S.R. Sales Co. Inc. during the years 1966 through 1974. The contracts provided that S.R. Sales would buy inventory from the taxpayer at a price tied to its scrap value, and that the taxpayer could later repurchase part or all of the inventory either at its manufacturing cost or at a price determined by the price the taxpayer wanted to sell the goods to a customer. All of the inventory was marked with the taxpayer's inventory numbers so that it could be easily reacquired when the need arose.

Three of the contracts provided that S.R. Sales would purchase all obsolete and slow-moving inventory of a certain general description which was offered by the taxpayer. The fourth contract provided that the items transferred were to be "mutually agreed upon." All of the contracts gave S.R. Sales title and the ability to sell to third parties without notice to or approval from the taxpayer, subject to the requirement that S.R. Sales remove the taxpayer's trademark prior to any sale in the general market.

The taxpayer treated the transactions with S.R. Sales as outright inventory sales that decreased its ending inventory, thereby increasing its cost of goods sold and reducing its taxable income. …

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