Kaps Warehouse, Inc. - Page 21

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           of $628,632 before the rebate and $668,632 after the rebate; (2)                           
           was in a profit position both before ($13,544) and after ($53,544)                         
           the rebate; and (3) had sufficient current assets to cover its                             
           current liabilities (i.e., it had sufficient short term liquidity                          
           in fiscal year 1992 to cover the accounts payable written off via                          
           the rebate).                                                                               
                 Clearly, KAW's financial statements do not reflect that its                          
           accounts payable to petitioner were uncollectible in the amount of                         
           the rebate.  Rather, in our opinion, petitioner gave the rebate in                         
           order to shift income from itself to KAW, where the income would be                        
           taxed at between 15 to 25 percent compared to petitioner's 34-                             
           percent tax rate.                                                                          
                        2.  Kapsco                                                                    
                 There is no evidence that Kapsco's accounts payable to                               
           petitioner  were  partially  worthless.  In  fiscal  year  1991,                           
           petitioner gave rebates totaling $120,000 to Kapsco. These rebates                         
           were given to four unincorporated Kapsco units (Idaho Falls--Park,                         
           Pocatello, Rigby, and Rexburg).  Because these particular entities                         
           did not have strong financial conditions, Mr. Lamprecht believed                           
           that the accounts payable were uncollectible, thereby justifying                           
           the rebates to Kapsco.                                                                     
                 However, Kapsco's financial statement reflects that it was                           
           capable of meeting its accounts payable obligation.  It is                                 
           irrelevant whether the financial condition of the  four                                    






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