128 T.C. No. 7
UNITED STATES TAX COURT
AFFILIATED FOODS, INC., A CORPORATION, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12846-04. Filed March 29, 2007.
P, a wholesale food purchasing cooperative, holds
one or more food shows a year at which member stores
and vendors selling to P meet. The vendors offer
special show discounts to member stores placing orders
with P for the vendors’ products at the food shows.
The special discount sometimes takes the form of a cash
payment from the vendor to the member store based on
the quantity of the vendor’s products ordered. Vendors
not bringing currency to the shows obtain cash for
those payments from promotional allowance accounts
established by the vendors with P or from checks given
to P and cashed by P. R treats such P-delivered
currency as, first, being received by P as a vendor
rebate, second, being returned by P to the vendor, and,
third, being paid by the vendor to the member store. R
considers the first step to result in a reduction in
P’s cost of goods sold and the third step to be the
payment by P of a defective (nondeductible) patronage
dividend. According to R, the defect is that the
payment is not out of P’s net earnings. The net result
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Last modified: November 10, 2007