Section of Taxation Publications
  VOL. 57
NO. 2
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
 Sales Price Adjustments: The Continuing Conundrum
Michael Baillif*

*Senior Manager, Ernst & Young LLP, Washington, D.C.; Yale Law School, J.D. 1992; Georgetown University Law Center, LL.M. 1994. The author gratefully acknowledges the suggestions and assistance of his colleagues, Diane Herndon, Jack Donovan, and Glenn Walberg.

I. Introduction

The identification and treatment of sales price adjustments are among the most wide-ranging, and under-analyzed subjects in the tax law. The consequences of such classification can be substantial and far-reaching. Generally speaking, the question of whether sales allowances, rebates, refunds, trade or other discounts, or other inducements to buy (referred to collectively as "sales price adjustments") are being provided by the seller, will govern the timing, character and treatment by the seller with respect to such adjustments. They also may determine the ability of the seller to recover over time the amount of the transfer through depreciation or amortization deductions. From the perspective of the purchaser, if a sales price adjustment is received, the purchaser would not recognize this amount in current income, but instead would reduce the basis in its newly acquired property or the cost of its assets held in inventory.

The proper parameters of the nature and scope of sales price adjustments have long been a matter of contention between taxpayers and the Service, and have represented a source of substantial confusion. This area is sufficiently broad that a single article cannot do it justice. As a result, this article is devoted to an examination of the sales price adjustment inquiry from the perspective of the seller. This article also considers two other intriguing issues involving incentives from nonsellers: inducements furnished by third parties with a business interest in the transaction, and inducements taking the form of nonshareholder contributions to capital under section 118.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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