Affiliated Foods, Inc., A Corporation - Page 1

                              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