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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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