74 T.C. 476 (1980), 3538-75, Dixie Daries Corporation v. C.I.R.

Docket Nº:3538-75, 3539-75, 10803-75, 1588-76, 1589-76.
Citation:74 T.C. 476
Opinion Judge:DRENNEN, Judge:
Party Name:DIXIE DAIRIES CORPORATION, et al.,[1] PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
Attorney:Walter L. Mims and Benton Burroughs, Jr., for the petitioners in docket Nos. 3538-75, 3539-75, 1588-76, and 1589-76. Thomas N. Carruthers, Jr., Lee C. Bradley, Jr., Gary E. Merringer, and Robert C. Walthall, for the petitioner in docket No. 10803-75. John B. Harper, for the respondent.
Case Date:May 29, 1980
Court:United States Tax Court
 
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Page 476

74 T.C. 476 (1980)

DIXIE DAIRIES CORPORATION, et al.,[1] PETITIONERS

v.

COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Nos. 3538-75, 3539-75, 10803-75, 1588-76, 1589-76.

United States Tax Court

May 29, 1980

1. Cash rebates paid by petitioners, wholesale milk dealers, to their customers, retail milk dealers, are excludable from petitioners' gross income. Sec. 162(c)(2), I.R.C. 1954, not applicable. Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956); Atzingen-Whitehouse Dairy, Inc. v. Commissioner, 36 T.C. 173 (1961); Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477 (1977), followed.

2. Advances made by Associated Grocers of Alabama, Inc., to Radio Broadcasting Co., one-third of whose stock it owned with an option to buy the other two-thirds, and which it operated, were contributions to capital and not loans. Bad debt deduction disallowed.

Walter L. Mims and Benton Burroughs, Jr., for the petitioners in docket Nos. 3538-75, 3539-75, 1588-76, and 1589-76.

Thomas N. Carruthers, Jr., Lee C. Bradley, Jr., Gary E. Merringer, and Robert C. Walthall, for the petitioner in docket No. 10803-75.

John B. Harper, for the respondent.

DRENNEN, Judge:

In these consolidated cases, respondent determined the following deficiencies in, and additions to, petitioners' Federal corporate income taxes:

Addition to tax
Taxable year under sec.
Docket No. Petitioner ending Deficiency 6653(a) [2]
3538-75 Dixie Dairies Corp. Feb. 29, 1972 $59,075.40 $2,953.77
Feb. 28, 1973 56,931.26 2,846.56
3539-75 Dairy Fresh Corp. Feb. 29, 1972 13,290.09 803.05
Feb. 28, 1973 66,795.41 3,339.77
10803-75 Pure Milk Co. Dec. 31, 1970 32,834.65
Dec. 31, 1971 148,140.95
1588-76 Consolidated Dairies
Co., Inc. Mar. 28, 1970[3] 25.00
Apr. 3, 1971 5,982.71 299.14
Apr. 1, 1972 185,744.79 9,287.24
1589-76 Associated Grocers of
Alabama, Inc. Apr. 1, 1967 1,796.51
Mar. 28, 1970 5,189.13 259.46
Apr. 3, 1971 141,642.46 7,082.12
Page 477 In addition, respondent made certain adjustments to the income and deductions of petitioner Associated Grocers of Alabama, Inc., for the taxable year ended April 1, 1972, which adjustments reduced the net operating loss for that year available to be carried back to earlier taxable years, including the carrybacks to the taxable years ended March 28, 1970, and April 3, 1971. Due to concessions by the parties, including respondent's concession that the section 6653(a) additions to tax are not applicable to any of the petitioners, the issues for our decision are: (1) (a) Whether certain payments made by each of the petitioners to its customers are to be excluded in determining gross income or are to be treated as deductions from gross income subject to the limitations of section 162(c)(2). (b) Whether, if the payments are deductions from gross income, they are nondeductible because of section 162(c)(2) since they were in violation of an Alabama State law which was generally enforced.[4] (2) Whether petitioner Associated Grocers of Alabama, Inc., is entitled to a business bad debt deduction under section 166 for the taxable year ended April 1, 1972, for advances made to Radio Broadcasting Co., a corporation in which Associated was a shareholder. Resolution of this issue depends entirely on whether the advances were loans or capital contributions. FINDINGS OF FACT Some of the facts have been stipulated and they are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. Petitioner Dixie Dairies Corp. (hereinafter Dixie Dairies) and Page 478 petitioner Dairy Fresh Corp. (hereinafter Dairy Fresh) are both corporations organized under the laws of the State of Alabama. At the time each corporation filed its petition herein, each had its principal office in Greensboro, Ala. Dixie Dairies and Dairy Fresh are related corporations (brother-sister) by reason of common ownership. Both Dixie Dairies and Dairy Fresh were accrual basis taxpayers, and each filed Federal corporate income tax returns for their fiscal years ended February 29, 1972, and February 28, 1973. During the above taxable years involved, both corporations were primarily engaged in the processing and sale, at wholesale, of fluid milk and related milk products. Each corporation's customers consisted, for the most part, of grocery stores, supermarkets, and other retailers of milk and milk products. Both Dixie Dairies and Dairy Fresh are also related corporations to Blackbelt Creamery Co., Inc. (hereinafter Blackbelt) by reason of common ownership. Blackbelt is not in the business of buying or selling milk or milk products. During the taxable years in issue, Dixie Dairies and Dairy Fresh deducted the following amounts, inter alia, for sales supplies on their corporate income tax returns: [5]
FYE Feb. 29, 1972 FYE Feb. 28, 1973
Dixie Dairies $124,209.41 $121,171.14
Dairy Fresh 27,687.67 154,977.23
These payments were made to Blackbelt pursuant to invoices sent by Blackbelt to each of the corporations. Both Dixie Dairies and Dairy Fresh accounted for the payments on their books by debiting sales supplies and by crediting cash. The payments to Blackbelt were not for actual sales supplies but were to reimburse Blackbelt for payments (hereinafter cash rebates or rebates) it had made to retail customers of Dixie Dairies and Page 479 Dairy Fresh in accordance with agreements that the two corporations had made with the retailers.[6] Petitioner Pure Milk Co. (a.k.a. Barber Pure Milk Co.) (hereinafter Pure Milk) is a corporation organized under the laws of the State of Alabama. Pure Milk was one of a number of companies in the milk industry owned by George W. Barber or, following his death on February 15, 1970, by his estate. Pure Milk had its principal office in Birmingham, Ala. Pure Milk was an accrual basis taxpayer, and it filed its Federal corporate income tax returns on a calendar year basis. Corporate income tax returns were filed for the years ended December 31, 1970, and December 31, 1971, the taxable years in issue. Pure Milk was primarily engaged in the processing and sale at wholesale of fluid milk and milk products. Pure Milk's customers consisted, for the most part, of grocery stores, supermarkets, and other retailers of milk and milk products. In 1970 and 1971, Pure Milk made cash rebates to retailers in the amounts of $54,137.81 and $282,082, respectively. For Federal income tax purposes in 1970, Pure Milk treated the cash rebates as exclusions from gross receipts in order to arrive at its net sales/gross income. These rebates were made by checks drawn on a special bank account of Pure Milk. For Federal income tax purposes in 1971, Pure Milk treated the cash rebates made in that year as a cost or expense in determining cost of goods sold. Of the $282,082 in total payments, $214,414.80 was paid or accrued prior to December 1, 1971. Of the total cash rebates in 1971, $114,029.93 thereof was paid by Pure Milk by checks drawn on the special bank account described in the preceding paragraph. The remaining amount, $168,467.31, was paid by the use of Barber Ice Cream Co., a wholly owned corporation of George W. Barber's estate. Barber Ice Cream Co. issued its checks to the retailers and, at the end of 1971, Pure Milk reimbursed Barber Ice Cream Co. for the payments made on Pure Milk's behalf. Petitioner Consolidated Dairies Cos., Inc. (hereinafter Consolidated), and petitioner Associated Grocers of Alabama, Inc. Page 480 (hereinafter Associated), are both corporations organized under the laws of the State of Alabama. At the time each corporation filed its petition herein, each had its principal office in Birmingham, Ala. Both Consolidated and Associated were accrual basis taxpayers, and each filed its Federal corporate income tax returns on the same fiscal year basis. The two principal taxable years in issue, for which each corporation filed returns, ended on April 3, 1971, and April 1, 1972, respectively.[7] Associated is a cooperative association of several hundred retail supermarkets, almost all of which are located in Alabama. These retail supermarkets own and manage Associated. From its inception in 1928 until 1962, Associated operated as a wholesaler of dry goods. Since 1962, it has expanded its services to its member supermarkets by entering additional lines of business, all of which are related in some way to its principal business. These additional lines do business primarily with Associated's member supermarkets. One of the additional businesses entered into by Associated subsequent to 1962 was the furnishing of milk and related milk products. On January 1, 1970, Associated organized Consolidated as a wholly owned subsidiary. Consolidated buys milk from dairy farms and packages, sells, and delivers it to member supermarkets of Associated and to other customers.[8] During the taxable years in issue, Consolidated and Associated paid cash rebates to retailers. During those years, Associated paid cash rebates in the amounts of $212,038.04 and $3,519.53, respectively. Consolidated paid similar rebates during the same taxable years in the respective amounts of $12,256.62 and $391,282.23. Such rebates were charged on the books of Associated and Consolidated as follows:
FYE Apr. 3, 1971 FYE Apr. 1, 1972
Associated
Sales $209,203.59
Other income:
(administrative fees) 2,834.45 $3,519.53
Total 212,038.04 3,519.53
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