T.C. Memo. 1999-136
UNITED STATES TAX COURT
AFFILIATED FOODS, INC., A CORPORATION, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 25703-93. Filed April 22, 1999.
William A. Hoy, for petitioner.
George E. Gasper, for respondent.
*
This opinion is on remand of Affiliated Foods, Inc. v.
Commissioner, 154 F.3d 527 (5th Cir. 1998), affg. in part, revg.
in part and remanding T.C. Memo. 1996-505.
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SUPPLEMENTAL MEMORANDUM OPINION
PARR, Judge: The dispute herein involves the Rule 1551
computation on remand from the opinion of the Court of Appeals
for the Fifth Circuit. On January 19, 1999, respondent filed a
computation for entry of decision for petitioner's tax years
ended September 30, 1989 and 1990. On February 1, 1999,
petitioner filed an amended computation for 1989 and 1990 that
differs from respondent's computation.
The findings of fact are set forth in our previous opinion,
Affiliated Foods, Inc. v. Commissioner, T.C. Memo. 1996-505,
affd. in part, revd. in part and remanded 154 F.3d 527 (5th Cir.
1998), and are incorporated herein by this reference. We repeat
only those facts necessary to an understanding of the instant
issues.
Petitioner is a wholesale food purchasing cooperative that
supplies food and other consumer products to retail grocery
stores owned by its shareholders (member stores). Petitioner
also conducts a small amount of business with stores not owned by
shareholders.
1
All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the taxable years in issue, unless
otherwise indicated.
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Member stores purchase food and other consumer products from
petitioner. Petitioner purchases these goods from manufacturers
and suppliers. Petitioner purchases directly from sales
representatives of some manufacturers, and it purchases other
manufacturers' products from independent brokers. Brokers
typically represent a variety of manufacturers or distributors.
Unless otherwise specified, we use the term "vendor" to refer to
manufacturers' sales representatives and brokers.
During the years at issue, manufacturers provided vendors
with promotional funds. These promotional funds were to be used
by the vendors to increase retail sales. Many vendors deposited
their promotional funds with petitioner. In our original
opinion, we concluded that these funds deposited with petitioner
were properly taxable to petitioner. See Affiliated Foods, Inc.
v. Commissioner, supra. The Court of Appeals for the Fifth
Circuit reasoned that, under the circumstances of this case, the
promotional account funds were not taxable to petitioner. See
Affiliated Foods, Inc. v. Commissioner, 154 F.3d at 533.
Petitioner also conducted annual food shows.
Representatives of member stores would attend these shows and
place orders for various products from the vendors. Each vendor
entered into an agreement with petitioner governing the vendor's
participation in the food shows. One of the conditions of
participation was that the vendor would offer approved special
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promotions, allowances, and/or special buys on products, with the
condition that all offers must be a "real show special".
Generally, the product promotional allowance was paid in cash at
the food show when the order was placed. In our original
opinion, we held that the amount of currency distributed by the
vendors to the member stores at the food shows was taxable to
petitioner.2 See Affiliated Foods, Inc. v. Commissioner, T.C.
Memo. 1996-505. The Court of Appeals for the Fifth Circuit
affirmed our reasoning on this issue and stated that these cash
rebates distributed at the food shows were properly characterized
as disguised patronage dividends. See Affiliated Foods, Inc. v.
Commissioner, 154 F.3d at 533.
One of the sources for the cash used by the vendors to make
payments at the food shows was the funds deposited with
petitioner in the promotional accounts. In the present Rule 155
computation, respondent seeks to include in petitioner's taxable
income the funds withdrawn from the promotional accounts and
distributed at the food shows by the vendors. Petitioner
maintains that this inclusion is inconsistent with the decision
of the Court of Appeals for the Fifth Circuit that the funds held
2
With appropriate substantiation, petitioner could have
deducted these amounts after reporting them as income. See sec.
1382(a) and (b). Petitioner, however, destroyed all
documentation regarding the cash rebates distributed at the food
shows, except for those involving Western Family Foods, Inc.
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in the promotional accounts are not the income or property of
petitioner.
We agree with respondent. Petitioner's analysis recognizes
that the funds in the promotional accounts expended for
advertising are not taxable to petitioner; however, it fails to
take into account that the food show rebates are. The Court of
Appeals for the Fifth Circuit recognized that some of the food
show rebates came from the promotional accounts when it stated
"Vendors * * * use the funds in their promotional accounts as a
means of supplying Vendor representatives with the necessary
rebate cash." See Affiliated Foods, Inc. v. Commissioner, 154
F.3d at 529. Accordingly, the funds withdrawn from the
promotional accounts and distributed at the food shows are
taxable to petitioner.
In addition, petitioner received $60,000 and $100,000 from
Western Family Foods, Inc., for distribution at the food shows in
1989 and 1990, respectively. At trial, petitioner acknowledged
that these funds constituted income to petitioner at the time of
receipt. Petitioner was able to substantiate that $35,616 and
$82,958 of these funds were distributed to member stores at the
food shows in 1989 and 1990, respectively. Thus, we held that
petitioner was entitled to deductions in these amounts. In the
original Rule 155 computation, petitioner's income was increased
by the difference between the amount of the funds given to
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petitioner by Western Family Foods, Inc. for use at the food
shows and the amount of such funds actually distributed at the
food shows. Thus, petitioner's taxable income was increased by
$24,384 for 1989 and $17,042 for 1990, respectively.
It was discovered later that petitioner had, in fact,
already reported these amounts. The original Rule 155
computation results in a double inclusion of these amounts in
income. Accordingly, petitioner's income should be reduced by
$24,384 and $17,042 for 1989 and 1990, respectively.
For the foregoing reasons,
Decision will be entered
under Rule 155.