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b. Respondent’s Argument: Defective Patronage
Dividends
As we understand respondent’s argument, it is that the trade
discounts that respondent deems petitioner to have received from
the vendors and to have passed on without alteration to member
stores on sales made to those stores do not reduce petitioner’s
gross receipts from those sales because those passed-on rebates
were defective patronage dividends.
According to respondent, the passed-on rebates resembled
patronage dividends in two respects. First, they were patronage
based. Indeed, respondent proposes that we find that the deemed
rebates “were based on the amount of product purchased, or
business done, by [petitioner’s shareholder-patrons]”. Second,
they were prearranged, at least in the sense that they were part
of the negotiated sale price of merchandise ordered by member
stores at the trade shows and were consistent with petitioner’s
policy of passing on to member stores discounts obtained from
vendors. Respondent argues, however: “[P]etitoner cannot show
that the dividends were calculated by reference to the net
earnings of the cooperative from business done with or for its
patrons.” Therefore, respondent concludes: “The amounts in
question do not qualify for the patronage dividend deductions.”
Respondent adds: “Once it has been determined that the amounts
at issue were disguised [we would say “defective”] patronage
dividends the analysis should stop.”
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Last modified: November 10, 2007