Karns Prime & Fancy Food, Ltd., (2005)

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Karns Prime & Fancy Food, Ltd., (2005)

T.C. Memo. 2005-233

UNITED STATES TAX COURT KARNS PRIME & FANCY FOOD, LTD., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 906-04. Filed October 5, 2005.

John D. Sheridan and Steven J. Schiffman, for petitioner. Gerald A. Thorpe, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION CHIECHI, Judge: Respondent determined a deficiency of $486,355 in petitioner's Federal income tax (tax) for the taxable year ended January 30, 2000 (year at issue).

The only issue for decision is whether the $1.5 million ($1.5 million at issue) that petitioner received from its principal supplier during the year at issue constitutes a loan that is not includable in its gross income. We hold that it does not.

FINDINGS OF FACT Some of the facts have been stipulated and are so found. At the time of the filing of the petition in this case, petitioner's principal place of business was in Mechanicsburg, Pennsylvania.

During the year at issue, petitioner, a corporation organized under the laws of Pennsylvania, operated several grocery stores in towns located around Harrisburg, Pennsylvania. During that year, Super Rite Foods, Inc. (Super Rite), one of petitioner's suppliers of grocery items since the 1970s, was petitioner's principal supplier.

In 1998, Scott Karns (Mr. Karns), who at all relevant times was petitioner's chief executive officer, concluded that petitioner needed $1.5 million for capital improvements. In that year, Mr. Karns approached Dale Conklin (Mr. Conklin), who was then president of Super Rite, to discuss obtaining financial assistance from Super Rite for petitioner's capital needs.

At certain times during the relevant time period, certain of Super Rite's customers approached it seeking some form of financial assistance (e.g., an advance of funds, a lease guaranty, a supply agreement commitment). Although Super Rite preferred that its customers obtain financial assistance from outside sources, from time to time (around 10 to 15 times a year) it decided to provide some form of financial assistance to certain of its creditworthy and strategically important customers in order to help them meet their respective financial needs. The amount of funds that Super Rite was willing to advance to a customer depended upon Super Rite's estimate of its potential profit under the supply agreement that it required of such customer.

Before Super Rite agreed to provide financial assistance to a customer, it required each such customer to (1) enter into a written supply agreement (supply agreement) that, inter alia, required t...

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