Kaps Warehouse, Inc. - Page 6

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           Taxable Income      Taxable Income                                                         
                                          Before Rebates          After Rebates                       
           Fiscal Year 1991                                                                           
                  Petitioner              $292,000                $116,124                            
                  Kapsco                  (107,987)               12,013                              
                  NPC                     (56,899)                149                                 
           Fiscal Year 1992                                                                           
                  Petitioner        251,323                       96,232                              
                  NPC                     (113,993)                     1,009                         
                  KAW                     13,544                  53,544                              

                  Petitioner determined the amount of rebates at the end of each                      
           fiscal year by giving consideration to its own taxable income as                           
           well as that of the related entities.  The rebates were based                              
           neither on volume discounts petitioner received from its suppliers                         
           nor on the volume of sales petitioner made to the related entities.                        
           Indeed, petitioner sold approximately the same quantity of                                 
           merchandise to its related entities each year. Further, there is                           
           nothing in the record to suggest that the rebates were tied to any                         
           benefits that petitioner received from the related stores.                                 
           The Related Stores' Financial Condition                                                    
                  a.  Kapsco                                                                          
                  Kapsco's fiscal year 1991 financial statements (which included                      
           the financial results of 9-10 individual retail stores) reflected                          
           total shareholders' equity of $419,322 and retained earnings of                            
           $274,868.  In that year, Kapsco received from petitioner $120,000                          
           in rebates. (Had there been no rebates in fiscal year 1991,                                
           Kapsco's total shareholders' equity would have been $299,322 and                           
           retained earnings would have been $154,868.)                                               





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