Kaps Warehouse, Inc. - Page 17

                                               - 17 -                                                 
            the rebates were reflected as a debit in accounts payable to                              
            petitioner and a credit to purchases.                                                     
                  Respondent asserts, and we agree, that the price petitioner                         
            charged its related stores for merchandise sold was not at arm's                          
            length because of the rebates.  The overall effect of the rebates                         
            was to shift income from petitioner to its related entities.                              
            Because this shift of income resulted from controlled transactions                        
            that were not at arm's length, petitioner and its related entities                        
            did not report their true taxable incomes. As a consequence,                              
            petitioner was able to reduce the correct amount of taxes it owed.                        
            Losses that could not advantageously be used by related entities in                       
            essence were shifted to benefit petitioner. (Without the rebates,                         
            both Kapsco and NPC would have had losses for Federal income tax                          
            purposes which would have gone unused in the years at issue.)                             
                  Mr. Lamprecht claims that he reviewed the accounts receivable                       
            due petitioner from the related entities and determined the amounts                       
            that were uncollectible.  According to Mr. Lamprecht, it was this                         
            uncollectible amount that determined the amount of the rebate.                            
            Further, Mr. Lamprecht claims  the  uncollectibility  of  the                             
            receivables justified petitioner's shifting (reduction) of income.                        
            Mr. Lamprecht testified that in determining the related entity's                          
            ability to pay, he revalued the related entity's assets (at the end                       
            of the fiscal year) on the basis of the amount that could be                              
            received if the entity were to be liquidated.  We believe this                            

Page:  Previous  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  Next

Last modified: May 25, 2011