Affiliated Foods, Inc. - Page 4

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          Promotional Accounts                                                        
               During the years at issue, manufacturers provided vendors              
          with promotional funds, which were sometimes referred to as                 
          "street money".  These promotional funds were to be used by the             
          vendors to increase retail sales.  Many vendors deposited their             
          promotional funds with petitioner.  Petitioner then deposited               
          these funds into its Amarillo account.  Petitioner did not                  
          maintain separate accounts for the promotional funds; the                   
          promotional funds were commingled with its general operating                
               Although petitioner commingled the promotional funds with              
          its general operating funds, petitioner maintained promotional              
          fund accounting records.  Petitioner furnished each vendor with a           
          statement regarding its receipts and disbursements of promotional           
          funds.  Petitioner did not charge vendors a fee for maintaining             
          these accounting records.  We shall refer to these promotional              
          funds and the associated accounting records as vendor promotional           

          3    Although these promotional funds and associated accounting             
          records are variously defined in the record as "record funds",              
          "promotional allowance accounts", etc., we will use the term                
          "promotional accounts".  We use this term and any reference to              
          payments, deposits, receipts, or deductions related to the                  
          promotional accounts for convenience only.  The substantive                 
          Federal tax characterization of these accounts and the                      
          transactions related to these accounts are legal issues that we             
          address in the Opinion section of this case.                                

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Last modified: May 25, 2011