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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
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