Westpac Pacific Foods - Page 11




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                                       OPINION                                        
          A.   Characterization of Payments                                           
               The parties devoted a significant portion of the trial                 
          toward determining the proper characterization of the upfront               
          cash payments which Westpac received under the purchase contracts           
          at issue.  Petitioner contends that such payments constitute                
          advance trade discounts; that is, the payments were made in sole            
          consideration of Westpac's obligation to purchase the volume of             
          goods stated in the contract.  Petitioner points to Westpac's               
          obligation under each of the purchase contracts to repay a                  
          prorated portion of the upfront cash payments if it failed to               
          satisfy its volume purchase commitment.7                                    

               6(...continued)                                                        
          stipulated the amounts that Westpac is required to include in               
          income as a result of these payments.  Therefore, the figures               
          determined by respondent in the deficiency notice do not coincide           
          exactly with those contained in the table above.                            
               7  The McCormick and GTE Sylvania contracts contained an               
          express repayment obligation.  While the Ambassador and American            
          Greetings contracts did not contain such an express provision,              
          petitioner's expert witness testified that such an obligation               
          existed implicitly pursuant to industry custom.  The existence of           
          an implicit repayment obligation is confirmed by Westpac's                  
          dealings with the greeting card manufacturers.  Westpac                     
          terminated its contract with American Greetings prior to                    
          satisfying its volume purchase commitment.  Upon termination,               
          Westpac issued a $406,243 check to American Greetings as a                  
          repayment of its contract advance.  Similarly, Westpac                      
          contemplated terminating its contract with Ambassador prior to              
          satisfying its volume purchase commitment.  In the course of                
          negotiations, Ambassador supplied Westpac with a calculation of             
          the amount of the upfront cash payment that Westpac would be                
          obligated to return.  Westpac never questioned its repayment                
                                                             (continued...)           





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Last modified: May 25, 2011