Affiliated Foods, Inc., A Corporation - Page 12




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          Respondent’s Adjustments                                                    
               Respondent attached to the notice of deficiency an                     
          explanation of his adjustments to petitioner’s tax liabilities              
          for the audit years.  The explanation states that respondent has            
          determined that “the food show distributions” to petitioner’s               
          shareholders are both income to petitioner and nondeductible                
          patronage dividends paid by it to its members.  Therefore, the              
          explanation continues, petitioner’s taxable income is increased             
          by $421,973, $489,685, and $144,122, for 1991, 1992, and 1993,              
          respectively.                                                               
                                       OPINION                                        
          I.  Introduction                                                            
               During the audit years, petitioner, a wholesale food                   
          purchasing cooperative, conducted one or more food shows a year             
          at which member stores met with vendors.  Among other things, the           
          food shows were designed to encourage member stores to order from           
          petitioner the vendors’ products offered at the shows.  Pursuant            
          to an agreement with petitioner, each vendor attending a show was           
          required to offer member stores special show discounts on the               
          vendor’s products offered at the show.  Petitioner referred to              
          those special show discounts as “show money”.  Vendors could make           
          show money available to member stores in one of two ways.  First,           
          a vendor could offer a member store a discount on an order placed           
          with petitioner at the show, petitioner having agreed to honor              







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