- 35 -
But if the analysis stops there, then respondent may well
lose. If the passed-on rebates are defective patronage dividends
because petitioner cannot show that they were calculated with
reference to its patronage-based net earnings, then, perhaps,
they were not calculated with reference to those earnings. If
not, then it would appear that section 1382(a) imposes no
restriction on petitioner’s reducing its gross receipts from
sales to member stores to reflect what respondent must concede
are price adjustments (i.e., trade discounts).10 Nor has
respondent advanced an argument separate from his defective
patronage dividend argument that any provision of subchapter T
prevents a subchapter T cooperative from subtracting trade
10 Moreover, in Pittsburgh Milk Co. v. Commissioner, 26
T.C. 707 (1956), and cases following that decision, the Tax Court
has held that when, as added consideration for a sale, a seller
rebates part of a customer’s purchase price or pays that customer
cash from a separate account, the amount of the rebate is not a
business expense, potentially deductible under sec. 162, but,
rather, a reduction of selling price. Regardless of whether the
rebate is legal (viz, whether sec. 162(c) would disallow
deduction of such an illegal rebate by that seller/taxpayer), the
seller is treated as if it never received more than the net
selling price (i.e., the stated selling price, less the rebate);
the amount of the rebate is excluded from the seller’s gross
income. See generally Max Sobel Wholesale Liquors v.
Commissioner, 630 F.2d 670, 671-672 (9th Cir. 1980), affg. 69
T.C. 477 (1977). In Max Sobel, 630 F.2d at 672, the Court of
Appeals for the Ninth Circuit further observed: “The Pittsburgh
Milk doctrine has the obvious merit of reflecting economic
reality.” The Commissioner has acquiesced to the Tax Court’s
holdings in Max Sobel and Pittsburgh Milk. See 1982-2 C.B. 2, 4;
see also Rev. Rul. 82-149, 1982-2 C.B. 56.
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