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Field Directive on Treatment of Sales-Based Vendor Allowances (“SBVA”) and Margin Protection Payments (“MPP”) under § 471

LMSB Control No.: LMSB-04-0910-026
Impacted IRM 4.51.2

September 24, 2010

MEMORANDUM FOR

INDUSTRY DIRECTORS, LMSB
DIRECTOR, FIELD SPECIALISTS, LMSB
DIRECTOR, PRE-FILING & TECHNICAL GUIDANCE, LMSB
AREA COUNSEL, LMSB
DIRECTOR, EXAMINATION, SB/SE
INDUSTRY DIRECTOR, GLOBAL HIGH WEALTH
CHIEF, APPEALS

 FROM:

Sergio Arellano /s/
Industry Director
Retailers, Food, Pharmaceuticals & Healthcare Industry

 SUBJECT:

Field Directive on Treatment of Sales-Based Vendor Allowances (“SBVA”) and Margin Protection Payments (“MPP”) under § 471


This Directive advises the field to treat a SBVA and a MPP as a purchase price adjustment and not as an income adjustment for purposes of § 471 of the Internal Revenue Code.  Additionally, this Directive advises the field to continue to rely on Treas. Reg. §1.471-8 to arrive at ending inventory value under the retail inventory method of accounting (RIM). 

SBVA Treatment
A SBVA is an allowance, discount, or price rebate that a vendor pays to a reseller to sell the vendor’s products to customers at a reduced price.  The amount the reseller receives is not based on the number of units of the vendor's products the reseller purchases but on how many units the reseller sells.  The field should treat a SBVA as a purchase price adjustment and not as an income adjustment.

MPP Treatment
A MPP is an allowance, discount, or price rebate that is related to a reduction in a taxpayer’s retail selling price of inventory and is intended to allow the taxpayer to maintain its margin of profit for inventory.  MPPs generally are intended to compensate retailers when the retailers mark down the price of goods that do not sell at full retail price.  The field should treat a MPP as a purchase price adjustment and not as an income adjustment.
 
Under Treas. Reg. §1.471-8, a taxpayer computes the value of ending inventory under RIM by multiplying a cost complement ratio by the retail selling prices of goods on hand at the end of the taxable year.  The numerator of the cost complement reflects the cost of goods.  Certain taxpayers are reducing the numerator of the cost complement ratio for MPPs without making corresponding adjustments to the denominator that would maintain a ratio equivalent to the cost complement ratio without the MPP.  Since the regulation, as currently written, may be interpreted to allow such treatment, examiners should not expend further examination resources challenging such treatment.

The Treasury Department and Internal Revenue Service are considering amending Treas. Reg. § 1.471-8 in the near future to clarify the treatment of MPPs (and similar allowances related to a retailer’s reduction in retail selling price) in the numerator of the formula of the RIM.  The field should continue to rely on the current Treas. Reg. §1.471-8 until further guidance is issued. 

For questions regarding this Directive, please contact the LMSB Inventory Technical Advisor or the LMSB Retail Technical Advisors. 

This Directive is not an official pronouncement of law and cannot be used, cited or relied upon as such.

cc:  Commissioner, LMSB
       Deputy Commissioner, LMSB
       Deputy Commissioner, International, LMSB
       Division Counsel, LMSB
       Commissioner, SBSE
       Director, Performance, Quality and Audit Assistance
       Director, Research & Workload Identification

 

Page Last Reviewed or Updated: 13-Mar-2014