Kaps Warehouse, Inc. - Page 16

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            entities, petitioner and its related entities clearly made up a                           
            controlled group of taxpayers for purposes of section 482.                                
                  Petitioner supplied 95 percent of its related entities'                             
            inventory. Petitioner's sales to these entities were therefore                            
            "controlled sales" for section 482 purposes.                                              
                  Petitioner booked sales to both related and unrelated entities                      
            at the time the merchandise was delivered, debiting its accounts                          
            receivable and crediting its sales.  The related stores accounted                         
            for delivery of this merchandise as a purchase by crediting their                         
            accounts payable to petitioner and debiting purchases. All the                            
            accounting was performed by petitioner.                                                   
                  Petitioner sold merchandise to all it customers (both the                           
            related and unrelated stores) at the same price.  However, at the                         
            end of the year, after petitioner reviewed the financial results of                       
            the entire operation of the controlled group, petitioner made                             
            rebates only to its related stores. These rebates had the effect of                       
            lowering the cost of the merchandise sold to the entities receiving                       
            the rebates, which in turn reduced petitioner's income and                                
            increased the incomes of the related stores.                                              
                  Petitioner gave preferential rebates totaling $176,548 and                          
            $155,000 in fiscal years 1991 and 1992, respectively. Petitioner                          
            accounted for these rebates by crediting accounts receivable and                          
            debiting sales, thereby eliminating the rebated sales from accrued                        
            sales for Federal income tax purposes.  For the related entities,                         

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