Nature of the Case
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Facts
P's primary business is the manufacture and sale of greeting cards, gift wrap, ribbon, stationery, and related products. P's social expression merchandise can be divided into two broad categories -- every day and seasonal. Everyday products are those which are normally purchased to commemorate birthdays, anniversaries, weddings, and similar occasions which occur throughout the year. Seasonal products are those designed to be sold during specific holiday seasons such as Halloween, Christmas, Easter, and St. Valentine's Day. When P was a smaller operation, Valentine merchandise could be shipped directly from P's production line in early January to be on display in time for the Valentine season in early February. As business increased, P was forced to resort to overtime schedules and expand production facilities in order to meet the seasonal demand. As the volume of business grew, logistical problems developed in transporting merchandise to customers in time to meet the seasonal demand. P solved this problem with a level production schedule. Merchandise for the Christmas and Valentine seasons was produced throughout the year and shipped to the regional warehouses. As the holiday seasons approached, the merchandise was reshipped to customers as their orders were placed. Title to the merchandise passed and its sale was recorded at the time of shipment from the warehouse. The costs of handling each piece of merchandise twice, renting warehouse facilities, and transportation made the warehouse system an expensive solution. P decided on a policy of shipping seasonal merchandise to customers in advance of the period during which the merchandise would normally be displayed and sold. Customers were less disposed to receiving Valentine shipments in advance. Merchants were unwilling to accept large shipments of Valentine merchandise while their stores were filled with Christmas merchandise. There also was an unwillingness to bear the cost of personal property tax on Valentine merchandise included in yearend inventory. P solved the problem by changing its terms of sale on Valentine's goods. Advance shipments were made but title to the goods and risk of loss would not pass to the buyer until January 1 of the following year. D challenged P's method of reporting the income from Valentine's sales. D allegedly improper deferral of income from Valentine sales until the calendar year following the year of shipment. P challenged the decision in tax court.
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