You're right about the deduction being taken away. That was done by a Tax Court (originally, I don't remember if the case was appealed) and the case was about a tool company's stock. The case was used as a precedent to cover books. Small runs, unknown authors, technical subjects, all get short shrift (the word was in English before 900ad) from the publishers. Funny how these things spread.
Okay, I have to jump in here, having some first-hand knowledge of the subject. It was the "Thor Power Tools" decision, circa 1979. The IRS, via the courts, changed the way publishers were permitted to amortize the costs of book production. Before Thor publishers could spread the cost over the sales life of the book, for however long it stayed in print, and depreciate unsold inventory. After Thor, publishers had to take all costs in the first three years, and had powerful tax incentives to
scrap all unsold inventory before the three years were up.
The result? Publishers churn inventory faster than ever, continuously produce "new" editions of successful titles in order to re-start the three-year depreciation clock, and give the average new release a 6- to 8-week shelf life. This means there is an enormous amount of waste in the system, and this waste has to be paid for somehow, and by someone.
By the way, when Barnes & Nobles or Borders "returns" a paperback book, they don't actually return it for resale or recycling. They just tear off the cover and send the cover to the publisher, and chuck the rest of the book in the local landfill. Ironic, innit?