Challenge Publications, Inc. v. Commissioner Internal Revenue Service

Appellant, Challenge Publications, Inc. (“Challenge”), appeals the Tax Court’s decision affirming $2,560,368 in deficiencies imposed by the Commissioner for the tax years 1972 through 1976. The Tax Court ruled that Challenge could not accrue as a deductible business expense an estimate for unsold magazines that it anticipated would be returned. Appellant claims that this practice satisfies the “all events” test or, alternatively, comports with established industry standards. We affirm.

BACKGROUND

The facts of this case are not seriously in dispute, and have been largely stipulated to. Challenge is a California corporation engaged in the business of publishing magazines sold to consumers by subscription, through traditional newsstands and through newsstand and magazine displays located in book stores and other retail outlets. During the taxable years in question, Challenge maintained its books and records and filed its income tax returns using the accrual method of accounting. During this period, Challenge distributed all of its magazines to be sold at newsstands through Publishers Distribution Corporation (“PDC”) and PDC’s wholesalers.

Challenge’s relationship with PDC was…