Kaps Warehouse, Inc. - Page 10

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            accounted for the rebates by debiting their accounts payable and                          
            crediting purchases.                                                                      
                  Petitioner kept track of the aging of receivables from                              
            unrelated stores through monthly computer reports. Ralph Dunn,                            
            petitioner's office manager, reviewed the accounts receivable aging                       
            sheets. Accounts that were not collected were sent to collection                          
            agencies. Mr. Dunn prepared the list of petitioner's accounts                             
            receivable to be written off by each store and recommended the                            
            amount of writeoffs. Petitioner's officers reviewed the list of                           
            proposed writeoffs of accounts, which was sent to Mr. Lamprecht at                        
            the end of each year. Generally, Mr. Dunn's recommendations were                          
                  After petitioner wrote off the delinquent accounts from                             
            unrelated entities, petitioner stopped selling merchandise to them.                       
                  Petitioner did not keep records to reflect the aging of                             
            accounts receivable from related stores.  Nor did Mr. Dunn                                
            recommend writeoffs for any of the related stores.                                        
            Petitioner's Federal Income Tax Returns                                                   
                  On its Federal income tax returns for fiscal years 1991 and                         
            1992, petitioner reported gross sales of $7,628,708.29 and                                
            $7,736,795, respectively.                                                                 
            Notice of Deficiency                                                                      
                  In the notice of deficiency, respondent determined that                             
            petitioner's gross sales for fiscal years 1991 and 1992 were                              

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