                         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.
                               - 3 -


     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
                                 - 4 -


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.
                                 - 5 -


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
                               - 6 -


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.
