AFFILIATED FOODS, INC., A CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12846-04
UNITED STATES TAX COURT
Filed March 29, 2007
128 T.C. No. 7
- Held: P is not collaterally estopped from challenging R‘s adjustments by our report in 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).
- Held, further, the payments that R charges P with making to member stores are properly characterized as trade discounts. They were not paid with reference to P‘s net earnings but merely passed along the price adjustments that P was entitled to on account of the orders placed by the member stores at the food shows. They reduce P‘s gross sales and are not defective patronage dividends.
William A. Hoy, for petitioner.
George E. Gaspar and Mark E. O‘Leary, for respondent.
HALPERN, Judge: By notice of deficiency dated April 22, 2004, respondent determined deficiencies in petitioner‘s Federal income tax of $143,978, $166,493, and $11,101 for petitioner‘s taxable (fiscal) years ended September 30, 1991, October 2, 1992, and October 1, 1993, respectively (the audit years). Petitioner is a corporation operating on a cooperative basis (a purchasing cooperative), whose shareholder-patrons operate retail grocery stores. The issues for decision concern the proper treatment of certain payments made to petitioner‘s shareholder-patrons at food shows petitioner conducted during the audit years.
Respondent increased petitioner‘s gross income for each of the audit years on account of those payments and denied petitioner any offsetting deductions on the ground that the payments are nondeductible patronage dividends. In part, respondent defends against petitioner‘s assignments of error by claiming that petitioner is precluded from challenging respondent‘s adjustments on the basis of the outcome in 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); on remand T.C. Memo. 1999-136. Petitioner denies that it is precluded from challenging the adjustments and claims that it did not receive the payments, but, if it did, the payments either did not increase its gross income because of offsetting adjustments or, if they did increase its gross income, it was entitled to offsetting deductions.
Unless otherwise indicated, all section references are to the Internal Revenue Code as in effect for the audit years. The references to subchapter T are to that subchapter (
FINDINGS OF FACT
Some facts are stipulated and are so found. The stipulation of facts, with accompanying exhibits, is incorporated herein by this reference.
Petitioner
Petitioner is a wholesale food purchasing cooperative that resells a variety of products to retail grocery stores in Texas, New Mexico, Oklahoma, Kansas, Colorado, and Arizona. At the time the petition was filed, petitioner maintained its principal place of business in Amarillo, Texas. Petitioner was incorporated in 1946 under the cooperative laws of the State of Texas to increase the bargaining power of member stores in their dealings with vendors.1 As of the time of the trial, petitioner had more than 239 shareholder-patrons, who operated approximately 715 member stores. Petitioner does not own any interest in any member store.
Petitioner computes its taxable income using an accrual method of accounting and pursuant to the provisions of part I
At the end of its fiscal year, petitioner returns the profits from its wholesale grocery purchasing business to its shareholder-patrons as patronage dividends.
Member Stores
Member stores determine independently of petitioner the types, brands, and quantities of the commodities that they purchase for resale to customers.
Promotional Allowance Accounts
From time to time, petitioner receives from some vendors and vendor representatives (without distinction, vendors)2 funds to be spent in promoting the sale of products offered by those vendors. Petitioner deposits the funds in its own bank account and, on its books, treats the deposits as liabilities owed to the contributing vendors. Petitioner identifies the balance on hand for each contributing vendor in a set of accounts that it has designated the “promotional allowance accounts” (promotional allowance accounts).
Petitioner negotiates with individual vendors to obtain discounts and allowances (without distinction, discounts) from the list prices advertised by the vendors. Thus, for example, for a limited time, a vendor of canned goods may offer $1 off on each case of its 16-oz. cans of peaches ordered.
Except with respect to certain special price discounts offered by vendors only at the food shows and described in the next paragraph, vendor discounts on merchandise purchased by petitioner reduce the price paid by (invoiced to) petitioner and are referred to by petitioner as “off-invoice” (off-invoice) discounts. Petitioner passes on to member stores off-invoice discounts it obtains from vendors unless the associated administrative costs exceed the amount of the discount. Hereafter, we shall use the term “usual discount” to describe any vendor discount other than the special price discounts offered only at the food shows.
Food Shows--General
Beginning in 1984 and extending at least through the audit years, petitioner held one or more food shows a year at which vendors and member stores met. One purpose of those shows was to encourage member stores to place orders with petitioner for the products that vendors promoted at the shows. The food shows held during the audit years were held in Amarillo, Texas.
Several weeks before each food show, petitioner sent invitations to member stores and vendors. Attendance at the shows by members, and participation in the shows by vendors, was voluntary. A vendor wishing to participate in a food show entered into an agreement with petitioner under which the vendor agreed to pay a participation fee, rent and decorate a booth at the show, and offer to member stores discounts on the products that the vendor offered at the show. Those discounts, although negotiable, were subject to petitioner‘s approval and had to be greater than the usual discounts. The special show discounts, although limited to orders placed at the food shows, were, like the usual discounts, based on the quantity of merchandise ordered.
Also, in preparation for each food show, each participating vendor provided petitioner with a “deal data sheet“, which, among other things, showed the products the vendor was promoting and the per-unit show discount (referred to by petitioner as “show money” (show money)) offered for each product. Petitioner had the right to reject individual product items. Vendors had discretion to make show money available to member stores in one of two ways: (1) a credit against the purchase price of the product to be reflected on the invoice to be issued to the member store by petitioner on fulfillment of the order after the food show (i.e., an off-invoice discount), or (2) an immediate payment
Vendors exercised their discretion with respect to show money by indicating their choices on the deal data sheets they submitted. Information from deal data sheets was transferred by petitioner to individual sheets for each vendor. Those sheets were then reproduced and bound into books (show books) for distribution to members attending the food show.
Each sheet in the show book had attached to it a perforated strip (tear strip) that the member store could detach and use to order from petitioner an item (or items) described on the associated sheet. The member store delivered the tear strip to the appropriate vendor, who, if an immediate payment of show money was called for, made that payment and then delivered the tear strip to petitioner for fulfillment of the order. Petitioner entered the necessary information from the tear strip into its billing and accounting records and, in most cases, then discarded the tear strips. Petitioner ordered additional
A member store had discretion not to receive show money in currency or by check from a vendor who had elected to offer show money that way. A member store had no discretion, however, to demand a payment from a vendor if the vendor had elected the off-invoice method of offering show money.
Petitioner‘s Profit on Sales to Member Stores
Petitioner profits on sales to member stores by marking up the prices it charges member stores from the prices it pays vendors. Except with respect to off-invoice discounts resulting from show money offered at the food shows, petitioner applies its customary markup to the price it charges a member store; i.e., the markup is applied to the vendor‘s list price less the usual discount obtained by petitioner. With respect to show money, petitioner applies any off-invoice discount only after adding its own markup. Thus, petitioner calculates that its margin (the difference between the cost and selling price) and its markup on food show orders are the same if a member store receives show
The currency used by vendors to pay show money had three possible sources: (1) the vendor‘s promotional allowance account, if the vendor gave petitioner written instructions to charge a specific amount against the account and to deliver currency in that amount to the vendor at the food show, (2) a vendor‘s check, given by the vendor to petitioner for the specific purpose of providing currency to the vendor at the food show, and (3) currency brought to the food show by the vendor and taken from an account of the vendor unknown to petitioner. In the first two cases, petitioner obtained the necessary currency from the Amarillo National Bank (the bank).
Petitioner obtained currency from the bank in denominations sufficient to meet the individual vendors’ requests for currency in specific denominations. Petitioner placed the currency in locked bank bags identified with numbers unique to each vendor. Immediately before a food show began, vendors retrieved their bags from petitioner at a central location after, first, verifying that the bag‘s contents were as expected and, second, signing a receipt.
At the conclusion of the food show, vendors who had received bank bags from petitioner returned to petitioner those bags and any currency they wanted to deliver to petitioner. Petitioner issued written receipts for the bank bags and currency returned.
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
We are concerned here only with show money made available to member stores in the second way; i.e., by an immediate payment by a vendor to a member store. Moreover, we are concerned with those payments only if they were made in currency (i.e., not by check), and then only if the currency was delivered by petitioner to the vendor at the start of the food show. We are not, therefore, concerned with payments out of currency brought to a food show by a vendor. The currency delivered by petitioner to a vendor at the start of a food show (which we shall refer to as petitioner-delivered currency) had one or perhaps both of two sources: (1) a charge against the vendor‘s promotional allowance account, at the direction of the vendor, for the specific purpose of providing the vendor with currency at the food show, and, (2) checks received from the vendor and cashed by petitioner for the same purpose. We shall use the terms “promotional-allowance
While, in the notice of deficiency, respondent explained that his adjustments to petitioner‘s Federal income tax for the audit years were based on his determination that petitioner‘s “food show distributions” to its shareholders are income to petitioner (and nondeductible patronage dividends paid by its members), respondent did not explain how he computed those adjustments. The parties have stipulated respondent‘s method of computation:
Respondent increased Petitioner‘s taxable income in each of the years in issue by an amount equal to the difference between: (a) the sum of (i) the cash amounts withdrawn from the Promotional Allowance Accounts and (ii) the checks delivered to Petitioner by Vendors * * * in anticipation of the Food Shows, over (b) the cash returned to the Petitioner at the conclusion of the Food Shows by the same Vendors * * * .4
We shall first address respondent‘s claim that petitioner is precluded from challenging respondent‘s adjustments. Since we believe that petitioner is not so precluded, we shall then address the parties’ other claims.
A. Introduction
Respondent asserts that the Court in Affiliated Foods, Inc. v. Commissioner, T.C. Memo. 1996-505, found that payments by vendors to member stores of petitioner-delivered currency during petitioner‘s 1989 and 1990 tax years were both gross income to petitioner and nondeductible payments of patronage dividends by petitioner to its shareholders. Relying on the doctrine of issue preclusion (or collateral estoppel), respondent argues that petitioner is precluded from relitigating those issues. Since, during the audit years, vendors also made payments of petitioner-delivered currency to member stores, respondent argues that those payments are items of gross income to petitioner for those years and nondeductible payments of patronage dividends.
B. The Doctrine of Issue Preclusion
In Monahan v. Commissioner, 109 T.C. 235, 240 (1997), we said:
The doctrine of issue preclusion, or collateral estoppel, provides that, once an issue of fact or law is “actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.” Montana v. United States, 440 U.S. 147, 153 (1979) (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979)). Issue preclusion is a judicially created equitable doctrine whose purposes are to protect parties from unnecessary and redundant litigation, to conserve judicial resources, and to foster certainty in and reliance on judicial action. See, e.g., id. at 153-154; United States v. ITT Rayonier, Inc., 627 F.2d 996, 1000 (9th Cir. 1980).
This Court in Peck v. Commissioner, 90 T.C. 162, 166-167 (1988), affd. 904 F.2d 525 (9th Cir. 1990), set forth the following five conditions that must be satisfied prior to application of issue preclusion in the context of a factual dispute * * * : “(1) The issue in the second suit must be identical in all respects with the one decided in the first suit.
(2) There must be a final judgment rendered by a court of competent jurisdiction.
(3) Collateral estoppel may be invoked against parties and their privies to the prior judgment.
(4) The parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision.
(5) The controlling facts and applicable legal rules must remain unchanged from those in the prior litigation. * * * ”
C. Discussion
1. Petitioner‘s Argument
Petitioner concedes that the first three conditions are satisfied. Petitioner argues that the fourth condition is not satisfied since, by assigning error to respondent‘s failure to allow it offsetting deductions or adjustments to gross income from sales--if we should decide in the first place that petitioner received anything on account of the vendors’ payments to members of petitioner-delivered currency--petitioner has raised issues that were neither litigated nor resolved in the prior litigation. Petitioner argues that the fifth condition is not satisfied since the controlling facts in this case are not the same as in the prior case.
2. Points Not at Issue in the Prior Litigation
“Collateral estoppel applies only to an issue that was actually litigated and determined in a prior action, not to an issue that might have been litigated.” Anderson, Clayton & Co. v. United States, 562 F.2d 972, 992 (5th Cir. 1977); see also Commissioner v. Sunnen, 333 U.S. 591, 597-598 (1948). As put by the Supreme Court in Commissioner v. Sunnen, supra at 598:
“Since the cause of action involved in the second proceeding is not swallowed by the judgment in the prior suit, the parties are free to litigate points which were not at issue in the first proceeding, even though such points might have tendered and decided at that time.”
Moreover, it is well settled that each taxable year is the origin of a new liability and of a separate cause of action. Id.; see also Estate of Hunt v. United States, 309 F.2d 146, 148 (5th Cir. 1962). In Cloud v. Commissioner, T.C. Memo. 1976-27, we held that the taxpayers were not collaterally estopped from challenging the Commissioner‘s disallowance of their deductions of certain expenses under a theory different from the losing theory they had advanced in litigation concerning the same types of expenses for prior years.
Petitioner‘s assignments of error to respondent‘s failure to allow it offsetting deductions or adjustments to gross income from sales do raise issues that were neither litigated nor resolved in the prior litigation. Although petitioner did raise
3. Difference in Controlling Facts
The fact that petitioner is free to argue for offsetting deductions or adjustments does not mean that it is free to argue that it has no gross income (or no gross receipts) on account of vendor payments to member stores of petitioner-delivered currency if that issue was settled in the prior litigation. See Jaggard v. Commissioner, 76 T.C. 222, 224 (1981) (issue-by-issue determination of whether collateral estoppel applies).
In both instances [i.e., in the case of both promotional-allowance currency and vendor-check currency], petitioner required the vendors to sign for the cash received, and, most importantly, it also required any unused cash to be returned to it at the end of the food show. This was not a check-cashing service. Unlike a check-cashing service, petitioner ensured that the check proceeds were either paid to its shareholders or returned to it. [Emphasis added.]
We ended our discussion of petitioner-delivered currency by concluding:
Petitioner was not a nontaxable intermediary with respect to the food show cash disbursements arising from the promotional accounts. * * * Similarly, as for the food show cash disbursements arising from the check-cashing transactions, petitioner exercised dominion and control over these funds, as evidenced by the return of any “unused” cash. Thus, these amounts
must also be included in petitioner‘s income. * * * [Emphasis added.]
Petitioner argues that the important facts we relied on in Affiliated Foods, Inc. v. Commissioner, supra, to support our conclusion that it exercised dominion and control over the petitioner-delivered currency are not present in this case. Petitioner claims that, unlike what we found for 1989 and 1990, during the audit years, (1) it did not require vendors to return to it any remaining petitioner-delivered currency not paid to member stores, and (2) although it had the final say, it did negotiate with vendors the amounts of show money the vendor would give. It also claims that, with respect to its 1993 food shows, vendors gave it no checks. While we are not certain about petitioner‘s third claim, we have made findings consistent with its first two claims. With respect to its first claim, we have found: “At the conclusion of the food show, vendors who had received bank bags from petitioner returned to petitioner those bags and any currency they wanted to deliver to petitioner.” See
Whatever limited power vendors had to negotiate food show money and, more importantly, their right to retain any
D. Conclusion
Respondent’s affirmative defense of issue preclusion fails.
A. Arguments of the Parties
Respondent argues that, for each of the audit years, petitioner has an item of gross income on account of petitioner-delivered currency because petitioner “asserted control over those funds and used the vendor representatives as conduits to make ‘disguised patronage dividends’ to its member stores at the food shows.” Respondent lists the following as among the important operative facts:6
Petitioner negotiated for the food show rebates and thereby provided for the direct payment of monies from vendors to members that would otherwise have accrued to Affiliated as earnings, i.e., rebates from vendors to Affiliated for product purchased by Affiliated.
A member received food show rebates based on the amount of product purchased at the show. The greater the product purchases meant more food show rebates.
Members committed to make purchases at the food show and subsequently bought the product through Affiliated.
In this manner, a member received rebates based on the amount of product purchased through Affiliated, and Affiliated was able to provide a patronage dividend without complying with the statutory requirements.
While petitioner disagrees that it paid any patronage dividends or asserted control over the petitioner-delivered currency (petitioner argues that it was only delivering to
The payments in question were simply price rebates; no different than the price discounts and rebates afforded Member Stores on a day-to-day basis throughout the year. The day-to-day rebates and price discounts also represented value passing from Petitioner, who granted them, to the Member Stores, who purchased the goods to which the rebates and discounts attached. * * *
If we should find that petitioner exercised sufficient control over the petitioner-delivered currency to cause us to conclude that petitioner had a receipt in an equal amount, petitioner argues that either the receipt did not increase its gross income because of an offsetting adjustment (either an increase in petitioner’s cost of goods sold or a reduction in the amount of its receipts from sales to member stores) or, if the receipt did increase its gross income, it had an offsetting deduction.
B. Discussion
1. Control
Petitioner organized the food shows and required vendors wishing to participate to offer special deals (show money) on their products offered and ordered at the show. In the case of an off-invoice discount, petitioner accorded the member store the discount and, in turn, was accorded an equal discount by the
Respondent justifies such indirection on the ground that petitioner asserted sufficient control over the circumstances surrounding the vendors’ receipts of petitioner-delivered currency that the vendors should be viewed as nothing more than petitioner’s agents engaged to pay to the member stores rebates from moneys (rebates) first received by petitioner. Respondent does not pin down the nature of that control, however, and the fact that respondent does not similarly treat the vendors as petitioner’s agents in the case of vendor-provided currency or checks (hereafter, without distinction, vendor-provided currency)
As set forth supra in section III.A., respondent claims as a fact: “Petitioner negotiated for the food show rebates and thereby provided for the direct payment of monies from vendors to members that would otherwise have accrued to Affiliated as earnings, i.e., rebated from vendors to Affiliated for product purchased for sale by Affiliated.” While it is true that petitioner negotiated with respect to show money and had the right to final approval and, therefore, exercised some control over show money, petitioner’s authority and rights were the same irrespective of whether the vendor chose to use petitioner-delivered or vendor-provided currency to pay show money to member stores. Yet respondent’s adjustments increasing petitioner’s income on account of rebates petitioner is deemed to have received is made only with regard to petitioner-delivered currency (and without regard to vendor-provided currency). If negotiation and approval with respect to show money signify control, then we do not see why those factors do not equally signify control with respect to vendor-delivered currency. The singular distinction between petitioner-delivered and vendor-provided currency is that the former came to vendors from petitioner’s hands. As explained in the next two paragraphs, we do not see that distinction as justifying different treatment.
If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. * * *
The doctrine does not apply to amounts a taxpayer receives as a mere conduit or agent for transmittal to another. E.g., Apothaker v. Commissioner, T.C. Memo. 1985-445. Indeed, in a case predating subchapter T and upholding the payer corporation’s exclusion from gross income of patronage based refunds, the Court of Appeals for the Fifth Circuit grounded its analysis in part on the following proposition: “‘[I]n order for receipts to
Petitioner-delivered currency came into petitioner’s hands on the understanding that petitioner would in short order deliver the currency to the vendors whose promotional allowance accounts had been debited, or whose checks had been cashed, to provide the currency. Petitioner lacked meaningful control over petitioner-delivered currency, and neither its receipt of checks from vendors, its withdrawal of currency from the bank, nor its delivery of that currency to vendors can, alone or together, serve as the basis for charging petitioner with having received rebates from vendors. With respect to this narrow aspect of the show money operation, petitioner merely served as a conduit, providing the vendors with liquidity from their own funds. We do not see that petitioner effectively exercised any more control over petitioner-delivered currency than it did over vendor-provided currency.
We end our discussion of control inconclusively because, so far as we understand respondent’s control argument, it is
2. Rebates
Both petitioner and the member stores are merchants. A merchant computes its gross income from sales during a year by subtracting from its revenue from sales the cost of the goods sold. See
While he has misunderstood how petitioner accounted for the off-invoice discounts, we assume that respondent would agree that, as between petitioner and the vendors, any off-invoice discounts or deemed rebates were trade discounts, which reduced the cost to petitioner of merchandise purchased from the vendors. See
We cannot improve on the Commissioner’s explanation in
In Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956), * * * the Tax Court addressed whether allowances, discounts, or rebates paid by a milk producer to certain purchasers of its milk, in willful violation of state law, are adjustments to the purchase price of the milk resulting in a reduced sales price, or ordinary and necessary business expenses under § 162 (in which case no deduction would be allowed under the rules of § 162(c)). The court reasoned that for income derived from the sale of property, in determining gain, the amount realized must be based on the actual price or consideration for which the property was sold and not on some greater price for which it possibly should have been, but was not, sold. The court focused on the facts and circumstances of the transaction, what the parties intended, and the purpose or consideration for which the allowance was made. The court found that the allowances were part of the sales transaction and concluded that gross income must be computed with respect to the agreed net prices for which the milk was actually sold. Thus, under Pittsburgh Milk, where a payment is made from a seller to a purchaser, and the purpose and intent of the parties is to reach an agreed upon net selling price, the payment is properly viewed as an adjustment to the purchase price that reduces gross sales. [Id., 2005-1 C.B. at 997; emphasis added.]
3. Cooperative Status
a. Introduction
SEC. 1382(a) . Gross Income.–-Except as provided in subsection (b), the gross income of any organization to which this part applies shall be determined without any adjustment (as a reduction in gross receipts, an increase in cost of goods sold, or otherwise) by reason of any allocation or distribution to a patron out of the net earnings of such organization * * * .
Subsection (b)(1) of
(1) on the basis of quantity or value of business done with or for such patron,
(2) under an obligation of such organization to pay such amount, which obligation existed before the organization received the amount so paid, and
(3) which is determined by reference to the net earnings of the organization from business done with or for its patrons.
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.”
We shall consider further the nature of patronage dividends.
c. Patronage Dividends Considered Price Adjustments
We have said: “Patronage dividends are considered rebates on purchases or deferred payments on sales, allocated or distributed pursuant to a preexisting obligation of the cooperative, and, as such, do not constitute taxable income to the cooperative.” Buckeye Countrymark, Inc. v. Commissioner, 103 T.C. 547, 558 (1994).
The notion that a cooperative should not be taxed on patronage-based payments because those payments amount to nothing more than price adjustments is a longstanding rationale underlying the Federal income tax treatment of patronage dividends. Subchapter T was added to the Internal Revenue Code by the Revenue Act of 1962 (the 1962 Act), Pub. L. 87-834, section 17, 76 Stat. 1045. Before the 1962 Act, non-tax-exempt cooperatives were taxed as corporations. See Ravenscroft, “The Proposed Limitation on the Patronage Dividend Deduction”, 12 Tax L. Rev. 151, 152 (1957). However, under administrative practices, judicially affirmed, they could exclude from gross income the amounts allocated to patrons as patronage dividends. E.g., Farmers Coop. Co. v. Birmingham, 86 F. Supp. 201, 219 (N.D. Iowa 1949) (collecting administrative rulings). Primarily,
Notes
Consolidated Foods, Inc. Comparison of gross profit on AFI‘s ledger of off-invoice/at-show payment: Item #27024
| Off invoice | At show | |
|---|---|---|
| Sale to AFI customer: | ||
| List price | $76.20 | $76.20 |
| Less: usual discount | 1.20 | 1.20 |
| Subtotal: Price before markup | 75.00 | 75.00 |
| Add Markup: 7.5% | 5.25 | 5.25 |
| Subtotal | 80.25 | 80.25 |
| Less: Off-invoice show money discount | .75 | n/a |
| Total amount billed to member store | 79.50 | 80.25 |
| AFI purchase price from vendor: | ||
| List cost | 76.20 | 76.20 |
| Less: | ||
| Usual discount | 1.20 | 1.20 |
| Off-invoice show money discount | .75 | n/a |
| Total cost of goods sold | 74.25 | 75.00 |
| Gross profit on AFI general ledger (margin): | ||
| Amount billed to member store | 79.50 | 180.25 |
| Less: cost of goods sold | 74.25 | 75.00 |
| Total margin | 5.25 | 5.25 |