t c memo united_states tax_court gac produce co inc an arizona corporation petitioner v commissioner of internal revenue respondent docket nos filed date j michael traher for petitioner marikay lee-martinez rachael j zepeda and j robert cuatto for respondent memorandum findings_of_fact and opinion parr judge respondent determined deficiencies in and additions to or penalties on petitioner's federal income taxes as follows additions to tax or penalties sec sec sec sec sec sec sec fye deficiency a a a a a d e dollar_figure dollar_figure -- dollar_figure dollar_figure -- -- -- big_number big_number -- -- -- -- dollar_figure dollar_figure big_number big_number -- -- -- -- big_number big_number big_number dollar_figure -- -- dollar_figure -- -- unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions the issue for decision is whether the commission fees petitioner received from certain related entities constituted arm's-length charges for the services rendered we hold that petitioner did not receive an arm's-length commission rate and that the commission rate should be adjusted as stated herein findings_of_fact some facts have been stipulated and are so found the stipulation of facts supplemental stipulation of facts and attached exhibits are incorporated herein by this reference when it filed its petitions petitioner had its principal office in nogales arizona petitioner an arizona corporation is in the business of distributing and marketing in the united_states fresh produce grown mostly in mexico petitioner files its federal corporate ‘see appendix income_tax returns on an accrual basis using a tax_year ending june during the years in issue alejandro canelos rodriguez mr canelos owned percent of petitioner's common_stock his cousin basilio georgacopulos kanelopulos mr kanelopulos owned percent of the common_stock and mr canelos' sister juana canelos de castro owned the remaining percent during those years mr canelos served as petitioner's president and chairman of the board_of directors and mr kanelopulos served as its treasurer during the years in issue petitioner had warehouse operations in both arizona and california petitioner handled produce year-round and was considered to be a major distributor of fresh produce in a normal year averaging percent of the entire u s fresh market tomato imports petitioner held a license issued by the u s department of agriculture doa pursuant to the perishable agricultural commodities act paca ch sec_3 and 46_stat_531 which permitted it to sell and distribute produce in the united_states petitioner's main source_of_income came from providing produce distribution services and most of its costs were associated with providing petitioner used a fiscal_year ending sept until date after that date petitioner changed its accounting_period to a fiscal_year ending june for both book and income_tax purposes those services petitioner's major expenses were fixed costs although it had some capital investments in warehouses and eguipment for years ending through petitioner reported the following taxable_income before net_operating_loss deductions or carryovers fye income dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number during the years in issue petitioner primarily sold tomatoes but it also marketed other produce including cucumbers bell peppers melons and grapes during those years petitioner distributed produce for mexican growers canelos growers that were related to and controlled by mr canelos for the years in issue the canelos growers operated under various names including canelos hermanos frutas y vegetales del valle frutave administradora horticola del tamazula adhota and productora abc productora the parties stipulated that mr canelos controlled petitioner and the canelos growers within the meaning of sec_1_482-1 through income_tax regs the canelos growers have been distributing produce in mexico for almost as long as they have been distributing produce in the united_states and the canelos growers have established relationships with mexican buyers they operated out of mr canelos' main office in culiacan sinaloa mexico hereinafter we will refer to petitioner and the canelos growers collectively as the canelos group to mr canelos and his brother constantino canelos rodriguez constantino collectively as the canelos brothers to the canelos brothers and members of their families collectively as the canelos family and to the canelos family and their related businesses collectively as the canelos organization the canelos organization functioned as a vertically integrated operation with farming packing and trucking operations in mexico and sales and distribution operations in the united_states for the years in issue the canelos growers' produce sales accounted for dollar_figure percent dollar_figure percent dollar_figure percent and dollar_figure percent respectively of petitioner's total sales although the entities under which the canelos growers operated changed names during the years in issue the majority of the members remained the same petitioner had the following sales and volume activity relating to the canelos growers for the years in issue fye sales boxes dollar_figure big_number big_number big_number big_number big_number big_number big_number petitioner's main selling season ran from november through mid-may it worked solely on commission and except for produce sold through robling cathey l a inc rcla a company owned by the canelos brothers petitioner did not take title to the produce it distributed in addition to the canelos growers' produce petitioner distributed produce for independent mexican growers otros growers not related to or controlled by the canelos family the otros growers generally were small growers who produced a different line of produce e g grapes european cucumbers squash melons from the main lines of produce handled by the canelos group none of the otros growers shipped tomatoes rcla division functioned as a separate division of petitioner until petitioner sold the division's assets to rcla effective date rcla was owned by international farm equipment distributors inc a liberian corporation owned equally by mr canelos and constantino produce sold through rcla is not in issue in the instant cases during the years in issue services generally performed by petitioner on behalf of the growers it represented both related and unrelated included a hiring mexican customs brokers to arrange for border inspections and clearing activities by mexican customs the doa and mexican trade associations b hiring u s customs brokers to arrange for inspection and clearing activities on the u s side of the border c paying border-crossing fees and charges which then were charged directly to the growers' accounts d for and paying mexican labor expenses for loading and unloading produce to be inspected on the mexican side of the border which were not charged to the growers e paying mexican legal expenses_incurred with respect to border crossings which were not charged to the growers f storing the growers' produce at petitioner's distribution warehouses in nogales arizona and or san diego california g paying laborers for unloading the produce at the warehouses h inspecting the produce at the warehouses for damage perishability and disease paying any expenses_incurred in repacking the produce if the pallets or cartons were torn broken or crushed when the produce arrived j destroying or returning to the grower any produce that petitioner found unsatisfactory k employing salespeople who negotiated the sales terms including the price to be paid for the produce invoicing the sales m arranging with the purchaser shipping schedules of the produce from petitioner's warehouses n loading sold produce onto the trucks of the purchaser o collecting from the purchaser the proceeds from the produce sales and crediting the growers' accounts when the produce was sold pp performing all duties associated with collecting the proceeds from the sales of produce including filing paca claims with respect to uncollected accounts gq liquidating the growers' accounts cr making final liquidations by disbursing funds from a grower's liquidation account at the end of the growing a grower liguidation is the payment to the grower of the difference between the sales_price and the charges and costs for selling the grower's produce season or after to days from the date of the last sale s debiting accounts_receivable and crediting sales for the full amount of the sale upon a sale of a grower's produce to a purchaser a sale could include produce from both related and unrelated growers t conducting promotional activities such as designing print advertisements and participating in industry trade shows and u performing at the grower's expense promotional activities involving labels not owned by either petitioner or related growers in liguidating an account petitioner subtracted from the sales proceeds its commission and all expenses and costs due from the grower petitioner then disbursed the remaining funds to the grower and gave the grower a liguidation sheet final settlement statement additionally petitioner performed the following services solely for the canelos family or for the canelos growers a making sales proceeds available for offset to the canelos growers ' loan accounts or for disbursement to them as soon as the sales were made b performing personal administrative duties such as paying bills for canelos family members c performing administrative duties for other entities owned or controlled by canelos family members d in and paying an employee of the canelos brothers or their related entities to coordinate growers not the otros growers in the baja california mexico region baja and to find additional land owners whose produce could be shipped through the canelos organization's packing plant in the baja alberto maldonado guerra mr maldonado served as petitioner's general manager during the years in issue he reported directly to mr canelos mr maldonado oversaw petitioner's day-to-day operations he monitored petitioner's financial status through daily sales reports weekly receivables and payables data and trial balances in addition to his position as petitioner's general manager mr maldonado served as secretary-treasurer of apollo produce distributors apollo which also was owned by the canelos brothers petitioner's head bookkeeper and office manager eva padilla mrs padilla reported directly to mr maldonado mrs padilla also served as vice president and secretary and a member of the board_of directors of rcla in addition she owned apache produce distributors inc apache with her husband peter padilla mr padilla mr padilla served as president of apache petitioner had approximately people in its accounting section it contracted with rcla to perform the sales function relationship with dole in date the canelos group began doing business with dole food co dole dole a publicly held company or some of its subsidiaries or affiliated companies hereinafter dole and its subsidiaries or affiliated companies collectively will be referred to as dole the business relationship between the canelos group and dole constituted a joint_venture the first agreement between dole and the canelos group was a l-year contract contract entitled sales subagency agreement in which petitioner and standard fruit and steamship co standard fruit a company affiliated with dole were the designated parties in the contract standard fruit agreed to use its marketing resources to market more effectively in the united_states and canada tomatoes cucumbers and bell peppers grown by the canelos growers in the culiacan district of mexico standard fruit would receive a commission of percent of total profit of each product computed after subtracting from total revenue from sales of the product by standard fruit petitioner some documents in the record refer to castle cooke inc rather than to dole although the exact business relationship is not explained in the record it appears that dole food co was a division of castle cooke inc for at least some portion of the years in issue for simplicity we will use the name dole throughout or the canelos growers selling costs freight costs product costs and any mexican-imputed business taxes assessed on sales of the product included in selling costs was a commission of cents per box paid to petitioner standard fruit further agreed to share in percent of the losses and to advance the working_capital needs of the venture up to dollar_figure million in date petitioner and produce america inc produce america a subsidiary of dole entered into a 5-year agreement contract entitled sales subagency agreement in the contract produce america agreed to use its marketing resources to market more effectively in the united_states canada and ekurope tomatoes cucumbers bell peppers squash and eggplant grown by the canelos growers in various areas in mexico it received a commission of percent of the total profit of each product profit was computed after subtracting from total sales revenue selling costs freight costs product costs duties and any mexican-imputed business taxes assessed on sales of the product included in selling costs was a commission of cents per box paid to petitioner produce america further agreed to share in percent of the losses and to advance the working_capital needs of the venture up to an amount mutually agreed upon by the parties the scp contract as of date petitioner and sun country produce inc scp a wholly owned subsidiary of dole entered into a year agreement scp contract entitled sales subagency agreement the scp contract superseded the contract and as amended was in effect during the years in issue hereinafter we will sometimes refer to the overall business relationship between the canelos group and dole under the scp contract as the scp deal under the scp contract scp agreed to use its marketing resources to market more effectively in the united_states canada and certain countries in europe tomatoes cucumbers bell peppers squash eggplant and any other fresh produce specified by the parties that was grown by the canelos growers in various areas in mexico scp received a commission generally of percent’ of the total profit on each product profit was sec dollar_figure of the sales subagency agreement dated as of date provides in pertinent part dollar_figure commission at the beginning of each growing season g a c and s c p shall mutually agree upon an annual profit target for all products in the territories rach year during the term of the agreement s c p shall as compensation_for its services be paid a commission for any annual period in which the actual profit equals or is less than the annual profit target of forty-five percent of the final season-end continued computed after subtracting from total sales revenue selling costs freight costs product costs import duties any mexican imputed business taxes assessed on sales of the product and any exchange rate losses due to either devaluation of the peso or the currency repatriation requirements of the mexican government included in selling costs was a commission of cents per box paid to petitioner the canelos growers received the remaining 55-percent share of the profits scp further agreed to share in percent of the losses and to advance funds for the working_capital needs of the venture up to an amount mutually agreed upon by the parties petitioner executed promissory notes with scp in which petitioner promised to repay the advances and mr canelos continued profit calculation made with respect to the growing and marketing of the products during the annual period as specified in sec_2 for any annual period in which the actual annual profit exceeds the annual profit target the following commission shall be paid to s c p s c p commission amount over annual percentage on amount profit target over profit target up to dollar_figure dollar_figure to dollar_figure dollar_figure and over should g a c and s c p be unable to reach agreement as to the annual profit target for any annual period during the term of this agreement the parties hereby agree that the annual profit target for such annual period shall be the lower_of the previous annual period's budget projections or actual financial results as shown on the financial statements guaranteed them individually and as petitioner's president scp gave the canelos group the right to use the dole trademark in connection with the distribution and sale of the products in addition the canelos brothers gave scp a nontransferable nonexclusive license to use their abc trademark in connection with the distribution and sale of products for the duration of the contract ’ petitioner agreed to arrange for consignment to scp for sale pursuant to the scp contract a minimum of percent of the total aggregate production by the canelos growers petitioner also agreed to be responsible for invoicing all sales arranged for or by scp under the scp contract petitioner did not share in the net profits or losses of the joint_venture and its only compensation was its commission scp separately paid for and provided additional marketing support to petitioner including the following additional services to petitioner employing one or two scp salesmen to work at petitioner's offices and help sell petitioner's produce salthough mr canelos' father established and registered the abc label in culiacan mexico petitioner registered the abc label in the united_states under petitioner's name when the canelos group began dealing with dole the scp contract allowed petitioner to use the dole label and dole to use the abc label without specific charge the benefit of usage of those labels was included in the commission rates charged providing national trade_association advertising providing booths at industry trade shows and promoting petitioner's abc label through association and advertising with dole no written contract authorized petitioner to represent the canelos growers in negotiations with scp or to enter into the scp contract although in form the scp contract designated petitioner and scp as the parties to the contract the scp contract stated among other things that both mr canelos and constantino individually and on behalf of the canelos growers intervened in the agreement and agreed to perform and be bound by all obligations undertakings and duties incurred in the above agreement by or as 'the growers in by oral agreement the canelos group and scp raised petitioner's commission rate under the scp contract according to a formula that in practice gave petitioner a commission rate of ‘by amendment dated as of date frutave also tintervened in the scp contract and agreed to perform and be bound by all obligations undertakings and duties incurred in the agreement by or as 'the growers' cents per box during the years in issue ’ petitioner's per- box commission rate was not affected by produce price fluctuations in petitioner received a commission of percent of gross_sales for produce distributed for productora in the baja under the scp contract in negotiating the scp contract on behalf of petitioner mr maldonado reviewed petitioner's general accounting and production records and considered petitioner's fixed costs its costs per box the number of packs petitioner had sold in previous years its previous years' income and the available projections dole's representatives prepared budgets and projections for the scp deal from data including information on volume and production supplied by mr canelos's farming operations scp incorporated the data into budget books which gave annual and historical data on the scp deal the canelos brothers and mr maldonado reviewed the data in the budget books for through the canelos brothers mr maldonado and representatives ‘by oral agreement the commission rate was amended commencing with the growing season as follows number of boxes commission per box big_number or greater dollar_figure big_number to big_number -40 big_number to big_number big_number to big_number less than big_number of dole each agreed to the closing yearly summary sheets for the years to showing overall profits or losses for scp the canelos growers and petitioner mr maldonado and petitioner's other employees provided information to scp and mr canelos regarding petitioner's day-to- day distribution function under the scp contract scp's employees and representatives in mexico obtained information directly from the canelos growers regarding their day-to-day farming operations under the scp contract at the end of each growing season between and mr maldonado reviewed data on petitioner's losses and he provided mr canelos with that data thereby making mr canelos aware that petitioner was losing money under the scp contract petitioner commingled funds advanced by scp received from produce sales and lent by commercial banks thereby making it impossible to trace funds from scp to a specific grower petitioner's records do not show advances including working_capital and liguidation advances to specific growers dole generally used a per box commission rate for its distribution operations dole's normal commission charge during the years in issue wa sec_55 cents per box all of petitioner's contracts with dole provided for a commission rate on the basis of boxes of produce although some of petitioner's competitors charged commissions on a per-box basis most of them charged on the basis of a percentage of sales petitioner was included in the scp deal because dole wanted a u s company to be involved in the transaction no written contracts exist authorizing petitioner to represent the canelos growers in negotiations with scp or to enter into the scp contract in the negotiations with dole mr canelos and mr maldonado negotiated on behalf of petitioner the canelos brothers negotiated on behalf of the canelos growers mr canelos had overall authority over the negotiations with dole on behalf of petitioner and the canelos growers for year ending dole estimated that the canelos growers would export approximately million boxes of tomatoes in addition to approximately million boxes of other produce for the years in issue the number of boxes of produce dole estimated that petitioner would sell for the canelos growers and the number of packs actually sold were as follows fye budgeted sold big_number big_number big_number big_number big_number big_number big_number big_number for years ending before petitioner never sold more than big_number boxes of produce during the year ending petitioner sold big_number boxes for years ending after petitioner never sold more than the number of boxes sold in the year ending the scp contract began in date and the first sales under the contract were reported on petitioner's tax_return for the year ending petitioner showed losses on its tax returns for all the years beginning with and following year ending the scp contract provided for an automatic 5-year extension absent notice of revocation given year before its date expiration date in the scp contract was extended automatically for years when petitioner did not give scp a notice of cancellation by date the canelos growers did not pay u s income taxes on their share of the profits earned under the scp contract petitioner the canelos growers and scp terminated the scp deal and extinguished all their obligations and business relationships under the scp contract effective date as part of the termination agreement and settlement of accounts between the canelos group and scp the canelos brothers and their related entities repaid advances scp had made to petitioner the canelos organization during the years in issue the canelos brothers used canelos hermanos an unincorporated business association as the name of the farming operations they jointly owned and operated canelos hermanos also did business as empaque abc which referred to the canelos baja produce and a canelos farm's packing shed in the baja petitioner owned the abc label and sold canelos growers' no grade produce under that label as well as under the dole label canelos hermanos was the only mexican grower except for the otros growers which shipped produce through petitioner from date through date canelos hermanos represented the canelos farming operations with respect to dole scp and petitioner until when frutave was formed and canelos hermanos no longer was used mr canelos was chairman of the board_of directors for frutave from its incorporation on date through between date and date frutave was the canelos entity through which the canelos growers operated under the scp contract frutave was the only mexican grower except for the otros growers which shipped produce through petitioner from date through date on date frutave agreed to be bound by the obligations undertakings and duties of the canelos growers in the scp contract and guaranteed petitioner's promissory notes entered into with scp mr canelos was the chairman of the board_of directors of adhota from its incorporation on date through adhota shipped produce through petitioner from date through the time of trial from date adhota was the canelos entity through which the canelos growers operated under the scp contract mr canelos was the general director of productora from its incorporation on date through productora shipped produce through petitioner from date through date productora bought the produce it distributed through petitioner from several farms during the years in issue the canelos family owned and controlled packing sheds in mexico in culiacan nio and the baja the managers at the packing sheds reported to constantino and other members of the canelos farming operations with the exception of the otros growers ' produce all mexican produce distributed through petitioner came through those packing sheds canelos hermanos frutave adhota and productora coordinated the distribution of the produce shipped through petitioner from the time that it left the packing shed until the time that the proceeds from the sale of the produce were returned to them the majority of the produce sold under the scp contract came from the canelos family's mexican packing houses mr canelos was president of transportes de carga y express transportes during the years in issue transportes a trucking company transported the canelos produce distributed through petitioner and apache from mexico to petitioner's and apache's warehouses in nogales arizona most of the produce sold under the scp contract was transported by transportes during the years in issue mr canelos owned and operated sunco and alcon inc alcon two liberian corporations sunco handled the loading and unloading of petitioner's produce on the mexican side of the border alcon paid a portion of petitioner's promissory notes for advances from scp under the scp contract the canelos brothers owned and controlled apollo apollo did not sell or distribute produce for the canelos growers apollo purchased cartons seed and various farming chemicals and resold them to the canelos growers apollo also purchased cartons for petitioner's other growers in addition during the years in issue apollo rented warehouse space to petitioner in california and to apache and bud antle inc bud antle a wholly owned subsidiary of dole in petitioner's complex in nogales arizona apollo gave apache the lowest rental rate apache could find for the warehouse it rented from apollo apollo and petitioner for years ending and and apollo petitioner and rcla for years ending and constituted a controlled_group within the meaning of sec_1563 in his negotiations with dole mr canelos attempted to reach an agreement that in the whole benefited his produce- related businesses including but not limited to petitioner the canelos growers transportes empaque abc and sunco potential comparable transactions the otros growers petitioner distributed grapes european cucumbers squash and melons for the otros growers during the years in issue produce from the otros growers that petitioner distributed did not include tomatoes petitioner charged them a commission rate of the greater of cents per box or percent of sales for services including border crossing loading and unloading warehousing marketing collecting of sales proceeds liquidating the accounts and distributing the sales proceeds petitioner retained cents per box of the commission fees collected and gave any remaining portion of the fees to the canelos growers petitioner also provided technical assistance and advances for seed boxes freight customs brokerage expenses and other expenses for which the otros growers reimbursed petitioner during the years in issue petitioner sometimes made money advances described as adelantes on petitioner's books to the otros growers the funds for the adelantes sometimes came from funds that scp lent to petitioner for advances for the scp deal petitioner generally made final liquidations to and paid all otros grower sec_30 to days after the final sale of their produce petitioner was the only entity within the canelos organization that provided marketing or distributing services for the otros growers the canelos growers did not provide any free services or supplies to the otros growers such as free cartons seed picking packing transportation or loading or unloading of trucks except for technical assistance and other miscellaneous items provided to grape growers in the canelos growers had no contracts with the otros growers the otros growers did not report to mr canelos they did not share in the split of profits between the canelos growers and scp under the scp contract and they received none of the proceeds from the canelos growers neither mr canelos nor constantino had any authority to represent the otros growers and they did not perform any service for them no joint_venture agreement existed between the otros growers and petitioner or scp the otros growers were not a part of the scp contract apache apache began operating in from through the time of trial it sold and distributed the canelos growers' no grade tomatoes apache sold in different produce markets than the markets petitioner used to sell the canelos growers no tomatoes generally no tomatoes sold at a lower price than no tomatoes the agreement between apache and the canelos growers relating to apache's sales of the canelos growers' no tomatoes in the scp deal was not in writing scp received the same profit or loss split whether petitioner or apache sold the canelos growers produce for the years through the canelos growers' business represented between and percent of apache's sales apache performed the same major distribution functions for the canelos growers that petitioner performed for them apache did not provide financing for the canelos growers apache used sunco's facility for crossing the border and paid sunco directly for that use apache did not advance money seed or boxes to its customers unlike petitioner apache purchased substantial amounts of produce and resold it in the years in issue petitioner handled the liguidation and transfer of funds to the canelos growers for apache apache occasionally used the canelos growers' mexican loading facilities in general apache charged the canelos growers a commission rate of percent of gross_sales and a handling charge of cents per box in addition to the handling charge of cents per box apache's commission rate for its other customers varied between and percent depending on the services rendered apache put the proceeds from the canelos growers' sales in apache's bank account it kept those proceeds until petitioner or mr canelos asked for the funds to be transferred to petitioner or distributed to mr canelos those transfers frequently were made several months after the mexican produce growing season ending in april or may for the years through apache transferred sales proceeds from the canelos growers' produce in the amounts of dollar_figure to petitioner's account and dollar_figure to the bank account of mr canelos' wife on its federal corporate_income_tax returns for years ending date through apache reported gross_receipts of dollar_figure dollar_figure dollar_figure and dollar_figure interest_income of dollar_figure dollar_figure dollar_figure and dollar_figure cost_of_goods_sold of dollar_figure dollar_figure dollar_figure and dollar_figure and taxable_income loss of dollar_figure dollar_figure dollar_figure and dollar_figure mr padilla was apache's primary salesman and apache had fewer employees than petitioner apache's fixed costs were lower than petitioner's fixed costs mr maldonado on behalf of mr canelos and the canelos growers and mr padilla on behalf of apache determined the commission rate that apache would receive for selling the canelos growers' produce mr maldonado had no selling marketing or operational responsibilities for apache bud antle beginning in and continuing through a portion of bud antle distributed celery brussels sprouts and subsequently lettuce for the canelos growers as part of the scp deal initially bud antle received a commission of percent of sales one-half of which was absorbed by scp petitioner - - received a commission of cents per box from the proceeds of the produce sold for the services it performed in distributing brussels sprouts celery and lettuce for bud antle in date bud antle formally became a party to the scp contract through a document entitled second amendment to sales subagency agreement bud antle amendment wherein from date to date petitioner appointed bud antle as its subagent relating to the marketing and sale of lettuce celery and brussels sprouts grown by the canelos growers in mexico under the bud antle amendment the term scp was defined to include bud antle scp and bud antle shared in the profits from the sale of the produce covered under the scp contract as amended in addition petitioner's commission of cents per box was eliminated with respect to the produce sold by bud antle instead bud antle received a commission of cents per box as compensation_for services in distributing the lettuce celery and brussels sprouts petitioner nonetheless received a commission of cents per pack for border crossing and related_services relating to the canelos growers' produce that bud antle distributed for them in operation bud antle did not receive its commission as a direct payment rather dole made an internal allocation on its books_and_records to account for the commission scp advanced financing to the canelos growers for the produce included under the bud antle amendment bud antle - - took full legal and beneficial title to the produce in mexico after its harvest william heintz mr heintz ’ negotiated the bud antle amendment on behalf of scp and bud antle and mr canelos negotiated on behalf of petitioner on date bud antle entered into an agreement with the canelos growers and the canelos brothers entitled the custom farming and crop purchase agreement bud antle purchase agreement the term of the bud antle purchase agreement was date through date the canelos brothers negotiated the terms of the bud antle purchase agreement on behalf of frutave and themselves and mr heintz negotiated on behalf of bud antle under the bud antle purchase agreement bud antle purchased and took full legal and beneficial title to lettuce celery and brussels sprouts grown by the canelos growers in mexico once the produce was harvested as owner bud antle sold the crops and collected the sales proceeds bud antle reimbursed the canelos growers for their estimated growing costs and then paid to the canelos grower sec_55 percent of the net sales proceeds ’ bud antle and the canelos growers shared losses ‘william heintz served as vice president and general manager of scp in and and as its president from through in addition he served as president of bud antle in and a portion of after which he served as president of dole fresh vegetables ‘net sales proceeds were computed in part by subtracting continued equally bud antle was responsible for arranging delivery of the produce petitioner received a commission of cents per box for its border crossing and some distribution services relating to the canelos growers' produce sold by bud antle the bud antle purchase agreement specifically stated that the parties to the contract operated as independent businesses and did not intend to create and were not creating among other things a partnership or a joint_venture on date bud antle leased a vegetable cold room loading docks a desk and a telephone located in nogales arizona from apollo bud antle also distributed produce in the united_states for growers not related to the caneloses for its services for the unrelated growers bud antle negotiated an overall pack charge for harvesting labor and equipment cartons selling transportation marketing inventorying warehousing and collecting sales proceeds but which did not include any charges for customs loading and unloading at the border nor warehousing at the border bud antle did not break down a commission rate in negotiating the overall pack charge but for internal accounting continued from sales proceeds the growing costs transportation costs petitioner's commission of cents per box and an allocation for bud antle's marketing charges calculated at dollar_figure a year plu sec_34 cents per box sold by bud antle purposes bud antle allocated a commission of cents per package for its services in addition to the pack charge bud antle received a share of the profits from the domestic sales bud antle did not perform any border-crossing activities for its domestic growers and took title to the produce grown by the domestic growers bud antle distributed the canelos growers' lettuce brussels sprouts and celery produce from through van dyke in date petitioner entered into a marketing agreement van dyke contract with van dyke farms van dyke an unrelated california grower pursuant to the van dyke contract petitioner agreed to market mix-melons for van dyke from may through date for a marketing commission of percent of the selling_price f o b shipping point van dyke deal in addition van dyke reimbursed petitioner for the services of david rojas one of petitioner's employees consequently van dyke in effect paid a commission rate of percent of sales which for the van dyke deal was the equivalent of a commission rate of cents per box petitioner performed no services for van dyke other than marketing activities and loading and unloading services for which van dyke reimbursed petitioner van dyke handled the warehousing and transporting of the melons the van dyke contract did not involve border-crossing activities because van dyke was located in the united_states fresh choice fresh choice produce inc fresh choice a california corporation was a distributor of green onions in date fresh choice entered into a commission merchant agreement agreement with manuel valladolid seamanduras on his own behalf and as representative of agro industrias vigor s_r l de c v agro a mexican corporation and vessey co vessey a california corporation in which each party agreed to share in the profits from the sale of green onions grown by agro in mexico and marketed by fresh choice internationally joint_venture fresh choice's and vassey's principal places of business were in the state of california fresh choice received a 25-percent share of the profits of the joint_venture agro received a 50-percent share and vessey received a 25-percent share profits were calculated net of expenses paid_by fresh choice on behalf of the joint_venture and of fresh choice's commission which was computed as follows although the agreement on its face is limited to green onions grown by agros and sold by fresh choice it appears that the sale of brussels sprouts and snow peas also was included in the joint_venture f o b price per unit commission so - dollar_figure dollar_figure 4a- dollar_figure - dollar_figure and up agro was responsible for all costs associated with growing harvesting packing and delivering the green onions to fresh choice in the agreement fresh choice agreed to perform all the work of transporting receiving storing loading distributing and selling the green onions grown by agro to collect the sales proceeds and to provide technical assistance it served as importer of record of the green onions fresh choice also agreed to advance working_capital funds and for that purpose it provided a line of credit to agro for which it received interest on loans against that line of credit vessey also provided financing for the joint_venture audit determination on audit respondent determined that the 55-cent-per-box commission rate petitioner received from the canelos growers did not constitute an arm's-length charge consequently respondent increased petitioner's income for commissions from the canelos growers by the following amounts commission commission income per income as fye return increase adjusted dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number respondent calculated the increased commission on the basis of petitioner's operating costs plu sec_54 percent of those costs in general opinion sec_482' gives the commissioner broad authority to allocate income deductions credits or allowances between sec_482 provides in any case of two or more organizations trades_or_businesses whether or not incorporated whether or not organized in the united_states and whether or not affiliated owned or controlled directly or indirectly by the same interests the secretary may distribute apportion or allocate gross_income deductions credits or allowances between or among such organizations trades_or_businesses if he determines that such distribution apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations trades_or_businesses in the case of any transfer or license of intangible_property within the meaning of sec_936 b the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible -- - commonly_controlled_organizations_trades_or_businesses if the commissioner determines that the allocation is necessary to prevent the evasion of taxes or clearly to reflect the income of the controlled entities the purpose of sec_482 is to prevent the artificial shifting of the net incomes of controlled taxpayers by placing controlled taxpayers on a parity with uncontrolled unrelated taxpayers see 102_tc_149 96_tc_226 92_tc_525 affd 933_f2d_1084 2d cir 67_tc_224 sec_1_482-1 income_tax regs the commissioner may make allocations under sec_482 even in the absence of tax_avoidance motives in order clearly to reflect the respective incomes of members of the controlled_group see 198_f2d_214 2d cir affg in part and revg in part 16_tc_882 thus establishment of a business_purpose for a transaction does not necessarily insulate the taxpayer from a sec_482 allocation see bausch lomb inc v commissioner supra pincite the parties have stipulated that mr canelos controlled petitioner and the canelos growers within the meaning of sec_1_482-1 through income_tax regs accordingly a reallocation of income between petitioner and the canelos growers is appropriate if the compensation paid to petitioner relating to its services for the related entities does not clearly reflect the true_taxable_income of the members of the controlled_group see 405_us_394 81_tc_520 the regulations set forth an arm's-length standard to determine whether reallocations between controlled entities are needed thus the regulations attempt to identify the true_taxable_income of each entity on the basis of the taxable_income which would have resulted had the entities been uncontrolled parties dealing at arm's length see sec_1_482-1 income_tax regs respondent's determination as set forth in the notice_of_deficiency is presumptively correct and petitioner bears the burden of disproving that determination see rule a 290_us_111 moreover respondent's sec_482 determination must be sustained absent a showing that he has abused his discretion see 85_tc_754 affd 849_f2d_393 9th cir to succeed therefore petitioner first must show that respondent's sec_482 allocations are arbitrary capricious or unreasonable see 88_tc_252 whether respondent has exceeded his discretion is a question of fact see 56_tc_961 in reviewing the reasonableness of respondent's determination the court focuses on the reasonableness of the result not on the details of the methodology used see bausch lomb inc v commissioner supra pincite ehli lilly co v united_states ct_cl 372_f2d_990 should the taxpayer overcome the commissioner's presumption of correctness and prove that the deficiencies set forth in the notice_of_deficiency are arbitrary capricious or unreasonable but fail to prove that alternative allocations it proposes satisfy the arm's-length standard the court must determine from the record the proper allocation of income between or among the controlled entities see eg sundstrand corp subs v commissioner supra pincite american terrazzo strip co v commissioner supra 42_tc_601 in the notices of deficiency respondent calculated that petitioner's commission income in total for the years in issue should be increased from dollar_figure to dollar_figure an increase of dollar_figure respondent now has adopted dr daniel j frisch's dr frisch opinion that petitioner's commission income in total for the years in issue should be increased to dollar_figure an increase of dollar_figure the deficiencies respondent adopted at trial are substantially lower than the amounts respondent determined and are based on a different methodology from the method used to calculate the notice amounts accordingly generally petitioner would need prove only that the commission it charged in the scp deal satisfied the arm's-length standard see national semiconductor corp consol subs v commissioner tcmemo_1994_195 petitioner however contends that respondent's change in method of calculating the deficiency from a cost-plus methodolgy to a comparable pricing methodology raises new_matter for which respondent bears the burden_of_proof we need not decide in this case whether respondent's use of a different method for calculating the deficiencies raises new_matter because as discussed infra the preponderance_of_the_evidence favors respondent services requlations sec_1_482-2 income_tax regs applies to transactions in which one related_entity provides marketing managerial administrative technical or other services for another related_entity for less than an arm's-length charge see sec_1_482-2 income_tax regs an arm's-length charge is defined as the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts sec_1 b income_tax regs unless the services are an integral part of the business activity of either the entity rendering the services or the entity receiving them the arm's-length charge is deemed to be equal to all the costs or deductions incurred which are directly or indirectly related to the services performed the taxpayer however may establish a more appropriate charge see sec_1_482-2 and income_tax regs the costs or deductions incurred in rendering the services however are not deemed equal to the arm's-length charge for services which are an integral part of the business activity of either the member rendering the services or the member receiving the benefit of the services see sec_1_482-2 income_tax regs services are considered an integral part of the business activity of a member of a group of controlled entities if bither the renderer or the recipient is engaged in the trade_or_business of rendering similar services to one or more unrelated parties the renderer renders services to one or more related parties as one of its principal activities iii the renderer is peculiarly capable of rendering the services and such services are a principal element in the operations of the recipient or iv the recipient has received the benefit of a substantial amount of services from one or more related parties during its taxable_year see id during the years in issue petitioner rendered marketing services to the unrelated otros growers similar to the marketing services it rendered on behalf of the related canelos growers therefore the services petitioner rendered on behalf of the canelos growers are considered an integral part of petitioner's business activity sec_1_482-2 income_tax regs consequently an arm's-length charge for the marketing services rendered by petitioner relating to the scp deal would be an amount that petitioner charged or would have charged an unrelated party for the same or similar services in an independent transaction under similar circumstances considering all relevant facts sec_1_482-2 income_tax regs petitioner contends that the commission rate it charged in the scp deal constituted an arm's-length rate respondent contends however that a party dealing at arm's length on behalf of petitioner would not have accepted the scp deal expert testimony in support of their respective positions each party has submitted the testimony of an expert witness or expert witnesses relating to what constitutes an arm's-length charge for the services petitioner rendered on behalf of the scp deal petitioner's expert witness petitioner submitted the expert report of dr roberta cook dr cook she has a ph d in agricultural economics and is employed as an extension economist in the department of agricultural economics at the university of california--davis dr cook's major area of specialization is fresh fruit and vegetable marketing she also works in the broad area of food distribution dr cook concluded that taking into consideration the nature and volume of the products as well as the functions performed and the risks assumed in petitioner's operations petitioner was charging its related growers a commission rate consistent with industry standards and in accordance with sec_1_482-2 b income_tax regs in assessing the arm's-length nature of petitioner's commission rate dr cook considered produce distribution industry standards distribution agreements between petitioner and unrelated parties particularly scp but also bud antle apache van dyke and the otros growers comparable agreements between other unrelated parties specifically fresh choice the nature of the products being distributed the volume of products being sold the types of functions and services performed and the risks assumed by the parties to the agreements dr cook stated that the scp contract was a third-party growing marketing agreement between scp petitioner and the canelos growers dr cook concluded that comparable produce distribution agreements between unrelated parties provided the most reliable basis for establishing an arm's-length commission for petitioner according to dr cook taken as a whole the third-party agreements and other industry agreements which she considered provided substantiation for the arm's-length nature of the commissions petitioner earned during the years in issue dr cook stated that when petitioner entered into the scp contract with dole petitioner agreed to a commission rate that was favorable given the large volumes that were expected to materialize according to dr cook in the low-margin food industry firms make their profits on volume dr cook asserted that commission rates are typically higher when distributors provide growers with advances to fund capital needs for planting harvesting packing and transportation dr cook noted that for the years in issue scp not petitioner advanced funds to the canelos growers according to dr cook for nogales distributors of mexican dominated by sinaloan fresh produce the common range of commissions wa sec_5 to percent of the gross selling_price she asserted that the larger the volumes handled and the fewer the services provided by the distributor the lower the commission rate she stated also that the financing of production harvesting and packing costs are the main services that caused commission rates to be on the high end of the range dr cook further stated that some u s -based distributors also offered extensive technical assistance in the form of production methods to their mexican growers and many had field staff operating in mexico she asserted that where those costly services were provided they were reflected in the commission rates sometimes reaching to percent according to dr cook when a distributor does not provide grower financing the range is more likely between and percent and when production-related technical assistance is not involved the range tends to be between and percent she stated further that volume lie the overall size of the deal also significantly affects the rate dr cook stated in this case it was scp dole that funded advances to the related growers and thus bore the cost of tying up this capital in addition the scp deal was a large volume deal and economies of scale were applicable gac provided no production technical assistance or field personnel while dole itself performed part of the marketing services via loaned salesmen and trade advertising ’ given these factors gac would not be expected to receive a commission at the upper end of the industry range rather it is my opinion that given the large expected volumes and unique character of the scp deal if a percentage commission rate would have been utilized it would likely have been on the lower end of the typical range observed in nogales approximately percent ‘sdole provided one to two salesmen that worked at gac's office in nogales selling produce for gac these salesmen were paid_by dole and were effectively loaned to gac to help market scp deal produce through dole connections thus dr cook concluded that petitioner's commission rate of cents per package was reasonably similar to the rate that would have been charged by an uncontrolled distributor negotiating with an uncontrolled grower under similar circumstances respondent's expert witnesses respondent submitted the expert report of dr frisch he has a ph d in economics from harvard university and is a managing director at horst frisch clowery finan inc an independent economic consulting firm specializing in transfer_pricing and other tax-related matters dr frisch's field of expertise is international tax in general and transfer_pricing specifically dr frisch concluded that the commissions petitioner received from the scp deal during the years in issue were not arm's length dr frisch asserted that the fact that petitioner's commission rate was mentioned in the scp contract does not imply that the rate is arm's length dr frisch stated that the owners of the canelos group were interested in the group's overall profits from the scp contract and therefore they might have been willing to accept a below-arm's-length commission rate for petitioner inasmuch as the canelos organization as a whole would receive offsetting benefits from other provisions of the scp deal therefore had petitioner been independent it might not have been willing to accept the commission rate specified in the scp contract according to dr frisch the commission paid to petitioner was just one piece of the financial arrangement between dole and the canelos group he stated while the arrangement as a whole was clearly arm's length it is not possible to tell directly whether any one piece of it taken in isolation was something to which arm's-length parties would agree dr frisch disagreed with dr cook's opinion that the van dyke apache or bud antle transactions were comparable to petitioner's transactions with the otros growers dr frisch stated that petitioner did not perform the same functions for van dyke as it performed for the canelos growers or for the otros growers in particular the van dyke transactions did not involve border-crossing activities van dyke did its own warehousing and it arranged for the buyers to pick up the produce from its facilities as for the apache transactions dr frisch stated that those transactions are not comparable to the scp deal because the market for off-grade tomatoes handled by apache was significantly different from the market for the high-quality tomatoes distributed by petitioner in the off-grade market the customers consist of buyers who are interested in a value -- - buy not in the quality of the product thus dr frisch concluded it would be inappropriate to use apache's transactions as comparables for petitioner's transactions with the canelos growers with respect to bud antle dr frisch asserted that because bud antle was related to scp and dole the commissions paid to it for marketing the canelos growers' celery lettuce and brussels sprouts may have been affected by other aspects of the relationship between scp and the canelos group additionally dr frisch also stated that because petitioner and bud antle shared the commissions it was not clear that bud antle performed the full range of marketing functions instead it may have merely assisted petitioner dr frisch concluded that the 10-percent commission rate petitioner charged the otros growers was consistent with the to 12-percent commission rates u s distributors charged for selling mexican produce in nogales arizona and other places as stated in a study entitled competition in the u s fresh vegetable industry written by john a vansickle emil belibasis dan cantliffe gary thompson and norm oebker and published by the u s department of agriculture economic research service agricultural economic report no date dr frisch stated that petitioner's commission rate received from the otros growers was generally in line with industry averages he asserted that the commission rate paid_by the otros growers for petitioner's services was simply the percent of sales actually paid_by those growers to petitioner he believed that the fact that petitioner paid a portion of the commissions to the canelos growers does not change that fact he asserted that petitioner would not have made the payment to the canelos growers had petitioner been an independent party operating at arm's length dr frisch concluded that the commission rates paid_by the otros growers provide the best evidence of an arm's-length commission rate for petitioner dr frisch stated that petitioner performed essentially the same functions for the otros growers as it performed for the canelos growers he stated that one difference in the transactions consisted of the quantities involved--over the years in issue the otros growers accounted for approximately percent of the total produce sold by petitioner with the canelos growers accounting for the rest according to dr frisch the normal practice for produce distributors was to charge the same commission to large growers as to small growers thus he stated the fact that the canelos growers were larger than the otros growers does not imply that they would pay different commission rates to an unrelated marketer consequently dr frisch concluded that no adjustment to the otros growers' commission rate was needed for the difference in volume -- - according to dr frisch an adjustment to the otros growers' commission rate was needed to account for a difference in the way in which petitioner forwarded the funds it received from the buyers on behalf of the canelos growers he stated that for the otros growers petitioner generally sent the funds to the growers approximately days after the date of sale however for the canelos growers scp lent working_capital which petitioner advanced to the growers after the sale of the produce petitioner immediately credited the net amount after expenses and commission from the growers' outstanding balances instead of actually sending money thus dr frisch concluded the canelos growers ended up paying less interest to petitioner than they would have had petitioner waited approximately days before giving the growers credit for the sale he asserted that petitioner accordingly enjoyed a 30-day time-value-of-money advantage with the otros growers that it did not have in its dealings with the canelos growers dr frisch said that the canelos growers would be in an equivalent position if petitioner charged the canelos growers the 10-percent rate with the otros growers' payment terms or if it charged them an 1l-percent rate with the actual payment terms it used for the canelos growers dr frisch asserted also that an adjustment to the otros growers' commission rate was needed to account for a service petitioner performed for the canelos growers that it did not --- - perform for the otros growers in and petitioner made payments of dollar_figure and dollar_figure to mr cecilio espinosa mr espinosa an employee of the canelos brothers or an entity controlled by them other than petitioner those payments were related to his activities in managing canelos growers located in the baja according to dr frisch as a marketer petitioner would not have made such payments to an employee of an unrelated group of growers and did not make such payments to the otros growers dr frisch stated that the adjustments he made improved the comparability of the otros growers' commissions and the canelos growers' commissions by accounting for the latter two differences in the transactions between petitioner and the canelos growers and petitioner and the otros growers he calculated that an arm's-length commission for petitioner for the years in issue would have been cents when expressed as a per-package rate or dollar_figure percent when expressed as a percentage of sales accordingly dr frisch concluded that petitioner's commissions for the years in issue in total would have been dollar_figure higher had petitioner been treated in an arm's-length fashion by the canelos growers his calculation of the increase in commission income for each year is as follows fye amount dollar_figure big_number big_number big_number total big_number dr frisch used a profit-split analysis and a comparison with industry averages to test the reasonableness of his conclusions he stated that the two reasonableness tests confirmed that applying the otros growers' commission rate with adjustments to petitioner's related-party transactions would result in petitioner's earning appropriate levels of income during through further he stated those tests indicate that petitioner's income levels as reported on its tax returns for the years in issue were not consistent with arm's-- length behavior therefore dr frisch concluded that it was necessary to adjust petitioner's commissions in order to make them consistent with the arm's-length standard respondent also submitted the expert report of enrique e figueroa dr figueroa he has a ph d in agricultural economics from the university of california-davis and is employed as a research associate for the department of agricultural resource and managerial economics at cornell university dr figueroa provided general background information on the produce industry discussion petitioner contends that the scp contract is an arm's-length agreement between two unrelated parties ie petitioner and scp and therefore sec_482 does not apply in the instant cases on brief respondent contends on the other hand that the scp contract represents a complicated arrangement in which petitioner functioned as a member of a combined_group not as an independent negotiating party the real issue respondent asserts in effect is whether the income petitioner reported on its u s corporate_income_tax returns for the years in issue pertaining to the scp deal constitutes a reasonable allocation of petitioner's share of the canelos organization's overall income from that deal for those years the parties have stipulated that petitioner and the canelos growers are controlled taxpayers within the meaning of sec_1_482-1 income_tax regs while on its face the scp contract was between dole and petitioner we are persuaded that in substance it was not merely between those two parties rather in our view the scp deal to which the scp contract related constituted a joint_venture between dole on the one hand and the canelos organization on the other it is clear from the record that dole considered petitioner and the canelos growers to be indivisible components of the canelos organization and that it was with the canelos organization that dole agreed to do business the commission payable to petitioner was merely one part of the overall earnings due the canelos organization relating to the scp deal how the canelos organization internally allocated its share of the income generated by the scp deal was inconsequential to dole as long as dole received its agreed-upon share of the joint venture's earnings thus the question for decision is whether the income the canelos growers allocated to petitioner pertaining to the scp deal for the years in issue clearly reflected its share of the combined income of the controlled taxpayers accordingly contrary to petitioner's assertion sec_482 does apply in the instant cases we must decide whether the commission rate paid petitioner in the scp deal represents an arm's-length charge for its services if it does not then we must decide what would be an arm's-length charge for those services arm's-length commission rate petitioner contends that mr canelos and mr maldonado negotiated a fair commission rate for the services petitioner rendered relating to the scp deal considering the expected volume industry standards and the amount scp was willing to pay petitioner maintains that it wanted the highest possible commission it could obtain because the canelos group kept percent of any commission petitioner received but received only percent of any farming profits respondent contends that petitioner's 55-cent-per-package commission rate’ was not negotiated at arm's length given that it did not even cover petitioner's fixed costs respondent contends that the canelos group agreed to an unprofitable commission rate for petitioner because they believed petitioner's losses would be offset by earnings from the scp deal of other members of the canelos organization petitioner counters that although mr canelos was aware generally of the commission rate that petitioner would need to break even he reasonably believed on the basis of dole's projections and the representations it would promote the canelos growers' produce and increase sales that petitioner could make a profit under the scp deal petitioner contends that had volume increased as dole projected petitioner's losses would have been eliminated ‘spetitioner asserts that the 55-cent--per-package commission rate converts to a rate of percent of sales using a weighted average package price of dollar_figure per package over the years through petitioner asserts further that the per-package rate would convert to a rate of percent of sales if the unusually high prices were ignored respondent disputes the accuracy of petitioner's percentage-of-sales calculations because the amounts are calculated on total canelos growers' proceeds not proceeds relating to sales made by petitioner respondent does not indicate what the percentage-of-sales calculations would be on the basis of corrected sales data the precise percentage rate to which the 55-cent-per-package rate would equate is not in issue in the instant cases all we need know is that the 55-cent rate is substantially less than the 10-percent rate that was paid_by the otros growers respondent maintains however that by the first year in issue it was unrealistic for petitioner to continue to rely on dole's projections respondent contends that under similar circumstances an independent party would have demanded an increased commission rate before permitting the scp contract to renew automatically at the end of its initial 5-year term petitioner however did not terminate the scp contract even though the commission rate did not cover petitioner's expenses we agree with respondent that a party operating at arm's length would not have continued in the scp contract under the terms of that contract we are persuaded that even before the years in issue the canelos group could not reasonably have expected to achieve the volume of million boxes projected by dole petitioner never had a profitable year while the scp contract was in effect we doubt that an unrelated third party would have been willing to continue in a similar unprofitable arrangement in our view from the inception of the scp deal the canelos brothers were not concerned with whether petitioner on its own realized a profit from the scp deal but rather whether the canelos organization as a whole prospered from the arrangement canelos-owned or controlled entities were involved in and compensated for all phases of the scp deal including providing seed cartons and chemicals apollo growing and packing the produce canelos hermanos frutave adhota or productora loading and unloading it sunco transporting it transportes and distributing it petitioner the expenses related to the operations of those other entities and we assume some profit to them were paid from sales proceeds before calculating any profit or loss split we are persuaded that had petitioner been an unrelated party it would never have agreed to retain the 55-cent-per- package commission rate for the years in issue we conclude that the 55-cent-per-package commission rate did not constitute an arm's-length rate the question then is what commission rate an unrelated party would have accepted for its services in the scp deal respondent contends that the otros growers' 10-percent commission rate serves as the best evidence of an arm's-length charge for the services petitioner rendered in the scp deal the otros growers were unrelated customers of petitioner respondent contends that petitioner's functions for the otros growers were in all important respects the same functions that petitioner performed for the canelos growers respondent maintains that to be comparable the 10-percent commission rate required only two adjustments to account for two additional services that the canelos growers received that the otros growers did not accordingly respondent contends for its services in the scp deal petitioner should have charged a commission rate of -- - percent--of-sales for the years in issue which equates to a per- package rate of cents petitioner denies that the otros growers' commission rate is the best evidence of an arm's-length charge for the services petitioner performed in the scp deal but maintains that the otros growers' commission rate is only one of several commission rates e rates charged by bud antle fresh choice apache and van dyke that must be adjusted before being considered reasonable comparables petitioner contends that the 06-percent-of-sales commission rate suggested by dr frisch and adopted by respondent at trial is based on flawed methodology and insupportable assumptions petitioner agrees that the services it performed for the otros growers were similar to the services it performed for the canelos growers petitioner however asserts that it provided additional services to the otros growers that dr frisch did not take into account such as providing technical assistance and advances in_kind boxes and seeds as well as providing money advances petitioner contends further that dr frisch inappropriately adjusted the otros growers’ commission rate upward to account for a service that dr frisch thought petitioner provided for the canelos growers that it did not provide for the otros growers ie that petitioner made funds available to the canelos growers immediately upon the sale of the produce whereas petitioner delayed making funds available to the otros growers until days after the sale petitioner maintains however that it credited all growers' accounts immediately upon sale therefore petitioner contends any use of a float adjustment would be arbitrary and inappropriate petitioner also contends that dr frisch did not adjust the otros growers' commission rate to reflect the distinction and character of the per-box rate structure used for the scp deal as contrasted with the percentage of sales fee structure used for the otros growers' transactions petitioner asserts that dr frisch used an after-the-fact analysis of a low-volume percentage commission rate structure to compare to a high-volume per--box rate structure petitioner contends that in the produce industry economies of scale justify volume discounts and that dr frisch erroneously failed to adjust the otros growers' commission rate for volume considerations petitioner contends also that dr frisch failed to adjust the otros growers' commission rate to reflect the type of produce sold by the otros growers that had different handling and distribution considerations than the fresh tomatoes sold by the canelos growers respondent contends on the other hand that in arriving at her conclusions dr cook did not place importance on the relationships to each other of the contracting parties any compensation under the contract in addition to the commission how the cost structure and financial position of the alleged comparable compares to petitioner's cost structure and financial position and whether the parties to the contract examined actually performed the same services as did petitioner respondent also contends that there are inaccuracies in dr cook's calculations respondent contends that bud antle's arrangements with the canelos growers and with its domestic growers varied significantly from petitioner's arrangement under the scp deal and therefore the bud antle commission rate cannot serve as a reliable comparable in determining petitioner's arm's--length commission rate respondent asserts that bud antle received a share of the profits under its arrangements or received compensation in addition to its commission it operated as part of dole making its transactions with scp related-party transactions and it did not perform any border-crossing services petitioner counters that the bud antle amendment is a reliable comparable for petitioner's commissions relating to the scp deal petitioner maintains that the 34-cent-per-package commission was independent of the profit split and that the commission was paid for bud antle's selling services according to petitioner bud antle received its share of the profits not directly through the bud antle amendment but indirectly through scp because bud antle's farming operations were part of the scp deal and scp provided financing for the bud antle deal petitioner contends that the bud antle purchase agreement also is a reliable comparable for similar reasons petitioner further contends that bud antle is not related to petitioner and that petitioner had nothing to do with bud antle's selling function which is comparable to petitioner's selling function additionally petitioner contends that the lack of a border- crossing function does not prevent bud antle's other domestic deals from being comparable to the scp contract because the border-crossing costs are a direct charge borne by the grower we agree that bud antle's commission rate in the bud antle amendment and the bud antle purchase agreement is not a reliable comparable for petitioner's commission rate in the scp deal bud antle was related to dole therefore the 34-cent-per-package commission rate was not bargained for at arm's length furthermore bud antle received additional compensation through a share of the profits and the dollar_figure payment that petitioner did not receive petitioner also contends that the fresh choice commission rate constitutes a comparable for petitioner's commission in the scp deal respondent contends that the fresh choice joint_venture is not comparable because it varied significantly from petitioner's arrangement under the scp contract respondent contends that fresh choice received more than the 55-cent commission rate because fresh choice received a share of the produce sale profits a marketing fee and interest on working_capital loans which petitioner did not receive respondent asserts further that fresh choice's fixed costs cannot be compared to petitioner's fixed costs petitioner contends that in the fresh choice joint_venture there were three transactions equity contribution equity line of credit and distributing services for which there were three forms of consideration profit share interest and commission according to petitioner the 55-cent commission rate fresh choice received related only to its distribution function we agree with respondent that the additional compensation fresh choice received that petitioner did not receive makes fresh choice's commission rate an unreliable comparable for petitioner's commission rate in the scp deal petitioner also points to the 5-percent--of-gross--sales commission with 15-cent--per-box handling charge apache charged the canelos growers for selling their no grade tomatoes as a reasonable comparable to petitioner's 55-cent-per-package commission rate in the scp deal petitioner contends that apache provided the same major distribution services for the canelos growers that petitioner provided respondent contends that apache's charges cannot serve as a comparable to petitioner's commission for the scp deal because apache had lower costs received part of its income from the actual purchase and resale of produce received special benefits from the canelos group had the use of millions of dollars of the canelos group's funds for several months until the funds were transferred and sold to a different market than the one to which petitioner marketed respondent contends further that apache is not a reliable comparable because although it did not technically belong to the canelos group it had very close ties to petitioner and the canelos group and it operated as a special preferred entity of the canelos group in our view the additional compensation apache received in the form of interest earned on the canelos growers' funds and the additional benefits apache received from petitioner in the form of uncompensated services petitioner performed for apache render the apache commission an unreliable comparable for petitioner's commission rate in the scp deal the fact that apache's commission rate for its other customers varied between and percent depending on the services rendered and indications in the record that mexican growers typically paid a higher lg commission rate for similar distribution services further in her writings dr cook has placed the commission rates continued demonstrate that the 5-percent commission rate apache charged the canelos growers was not a reliable comparable for the scp deal especially in light of the fact that a 5-percent commission rate would have resulted in even higher losses than petitioner already incurred at the 55-cent---per-package rate petitioner also contends that the van dyke commission rate of percent of sales constitutes a reliable comparable for petitioner's 55-cent-per-package rate respondent contends that the van dyke commission rate is not a reliable comparable because the van dyke deal was a limited melon deal for which petitioner provided fewer services especially border-crossing services than it provided for the canelos growers in the scp deal we agree that the 8-percent commission rate is not a reliable comparable petitioner performed no services for van dyke other than marketing activities and loading and unloading services for which van dyke reimbursed petitioner van dyke handled the warehousing and transporting of the melons the van dyke contract did not involve border-crossing activities moreover van dyke reimbursed petitioner for the salary of one of continued charged by distributors to mexican growers pincite to percent the data on which dr cook relied for those numbers came from the confederacion de associaciones agricolas del estado de sinaloa caades the largest mexican grower association and from the mexican growers themselves petitioner's employees making the van dyke commission in effect percent of sales we are persuaded that the 10-percent commission rate paid_by the otros growers is the most reliable comparable commission rate for the marketing services petitioner rendered in the scp deal petitioner performed substantially the same marketing services for the otros growers as it performed for the canelos growers the otros growers were not related to any of the principals in the scp deal consequently negotiations between petitioner and the otros growers were at arm's length the otros growers also are mexican growers consequently their circumstances are more similar to the canelos growers' than to the u s growers' in addition the commission petitioner received from the otros growers served as its only form of compensation_for the marketing services petitioner rendered on their behalf we agree with respondent that the fact that petitioner paid a portion of the commissions to the canelos growers does not require an adjustment of the 10-percent commission rate the contractual arrangement petitioner had with the otros growers did not require that petitioner give them money advances the otros growers thus agreed to pay and did pay petitioner the percent commission rate regardless of whether petitioner advanced them funds petitioner's actions in forwarding to the canelos growers the difference between the 10-percent-of-sales amount and the 55-cent-per-package amount did not affect the fee the otros growers owed petitioner for services rendered on their behalf in its briefs petitioner ignored the adjustment dr frisch made to account for the payments petitioner made to mr espinosa in and for services he rendered on behalf of the canelos brothers or an entity controlled by them other than petitioner relating to the canelos growers located in the baja in our view an unrelated party would not have made those payments to mr espinosa without seeking reimbursement from the canelos growers we believe however it is not appropriate to make an adjustment in the commission rate for the years in issue to account for those payments especially in light of the fact that those payments were not made throughout the years in issue rather we believe that had petitioner not been related to the canelos growers it would have sought direct reimbursement from them for the payments it made on their behalf to mr espinosa similar to the reimbursement petitioner sought and obtained from the canelos growers and the otros growers when it paid other expenses relating to their operations accordingly we believe and so hold that the adjustment for payments to mr espinosa should come in the form of a direct reimbursement to petitioner in the amount of the payment petitioner contends that no adjustment is needed for the time_value_of_money because it credited all growers accounts at the time of sale petitioner ignores the fact that it stipulated that an additional service it performed for the canelos growers that it did not perform for the otros growers was to make sales proceeds available for immediate disbursement as soon as sales were made dr frisch's 1-percent time-value-of-money adjustment is aimed at that additional service and appears justified petitioner has presented no data to support a lower adjustment for this factor therefore we accept the amount propounded by dr frisch we do not agree with petitioner that an adjustment to the 10-percent commission rate is needed for volume considerations we believe that bargaining at arm's length no unrelated party would be willing to grant a volume discount which would result in its consistently operating at a loss we also are persuaded that no adjustment is needed to reflect the variance between the type of produce petitioner sold for the otros growers and the type of produce petitioner sold for the canelos growers the record does not provide sufficient evidence to support the use of that adjustment or if it were appropriate to quantify the amount of the adjustment similarly the record does not provide sufficient data to quantify adjustments petitioner claims are needed to account for alleged additional services it performed for the otros growers that it did not perform for the canelos growers furthermore we do not agree with petitioner that a lower commission rate is justified because petitioner did not provide funding for the scp deal scp lent money to petitioner with which to make those advances petitioner was principally responsible for repayment of those loans and for payment of the interest due on them we are persuaded that an unrelated party under similar circumstances would demand a commission rate in the higher range accordingly on the basis of the foregoing we hold that for the years in issue income should be reallocated to petitioner in a manner to effect a commission rate of percent of sales for the scp deal produce petitioner sold during those years in addition for and income should be reallocated to petitioner in the amount of any payments petitioner made to mr espinosa on behalf of the canelos growers to reflect the foregoing decisions will be entered under rule appendix the parties settled some of the adjustments determined in the notices of deficiency dated date and date as follows petitioner must recognize additional other miscellaneous income for year ending date in the amount of dollar_figure petitioner must recognize additional farm contract income for year ending date in the amount of dollar_figure petitioner must recognize income from the sale of property for year ending date in the amount of dollar_figure petitioner must recognize unreported commission income for year ending date in the amount of dollar_figure petitioner must recognize pallet income for years ending date and in the amounts of dollar_figure and dollar_figure respectively petitioner is entitled to foreign commission expense deductions for years ending date and in the amounts of dollar_figure and dollar_figure respectively petitioner has no unrelated grower income for years ending date and petitioner must recognize commission income---unrelated growers for years ending date and in the amounts of dollar_figure dollar_figure and dollar_figure respectively petitioner is entitled to deductions for mexican labor expenses for years ending date and only in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure respectively petitioner is entitled to deductions for legal expenses for years ending date and only in the amounts of dollar_figure dollar_figure and dollar_figure respectively petitioner is entitled to a deduction for legal and accounting expenses for year ending date only in the amount of dollar_figure -- - petitioner is entitled to deductions for bad_debt expense for years ending date and only in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure respectively although respondent concedes this issue in the instant case respondent does not agree that absorption of the bad_debt expenses by petitioner the produce distributor for the grower is a practice common in the produce industry but continues to maintain the positions that a produce distributor's absorption of the bad_debt expense for the grower is not a practice common in the produce industry and any bad_debt expense absorbed by petitioner can be taken into account when calculating the sec_482 commission adjustments and or additions to tax or penalties petitioner must recognize a dollar_figure gain for year ending date from the sale of the rcla division to alejandro canelos in addition petitioner does not have to recognize any gain from the sale of the rcla division for year ending date and petitioner is not liable for any penalty under sec_6662 for year ending date relating to the sale of the rcla division property petitioner is liable for a penalty under sec_6662 for a substantial_valuation_misstatement as described in sec_6662 for year ending date relating to the dollar_figure gain on the sale of the rcla division property petitioner is entitled to a deduction for depreciation expense for the year ending date only in the amount of dollar_figure petitioner is entitled to a net operating losses deduction for year ending date in the amount of dollar_figure the dollar_figure is the entire allowable net operating losses deduction arising from years prior to year ending date unless this court's determination of the unresolved issue in the instant cases results ina net_operating_loss for any of the years ending date or petitioner will not be entitled to carry forward any net operating losses to year ending date petitioner must recognize additional income for year ending date in the amount of dollar_figure petitioner is entitled to a deduction for charitable_contributions for year ending date only in the amount of dollar_figure -- - petitioner must recognize additional interest_income computed under sec_482 for year ending date in the amount of dollar_figure the dollar_figure is subject_to an addition_to_tax under sec_6651 the additions to tax under sec_6653 and sec_6661 do not apply to the dollar_figure petitioner does not have to recognize any interest_income computed under sec_482 for years ending date and the penalties under sec_6662 d do not apply to the interest_income computed under sec_482 for years ending date and there are no additions to tax under sec_6651 and or penalty under sec_6662 relating to the interest_income computed under sec_482 for year ending date sec_59a controls the environmental_tax deduction and that deduction will be calculated based on the court's final_determination as to the taxable_income for years ending date and for the years in issue petitioner was a member of a controlled_group as defined in sec_1563 the income_tax brackets environmental_tax exemptions and any other tax benefits described in sec_1561 will be allocated equally among the members of the controlled_group as specified in sec_1561 for years ending date and for years ending date and the controlled_group consisted of petitioner and apollo produce distributing inc for years ending date and the controlled_group consisted of petitioner apollo produce distributing inc and rcla inc


qwhuqdo 5hyhqxh 6huylfh department of the treasury number release date index no washington dc person to contact telephone number refer reply to cc ita - plr-152367-01 date date dear requested a private ruling on your behalf in a letter dated date their letter states that they prepared your federal_income_tax return for with an error electing to include the entire amount of net_capital_gain reported on line c in investment_income reported on line e this error occurred in part because of a mistake by a staff member and in part because of a problem with the computer_program used to produce the return you have requested permission to revoke this election sec_163 of the internal_revenue_code includes in investment_income so much of certain net_capital_gain as the taxpayer elects to take into account under that clause sec_1_163_d_-1 of the income_tax regulations permits the taxpayer to revoke this election with the consent of the commissioner this letter grants permission to revoke the election on behalf of the commissioner caveats a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 of the internal_revenue_code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent enclosures sincerely clifford m harbourt office of associate chief_counsel income_tax accounting


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c aug uniform issue list tt ep p her kee x k xk legend taxpayer a ira x financial_institution a financial_institution b employee amount dear this responds to your date request as supplemented by correspondence dated date for a waiver of the 60-day rollover requirement of sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalties of perjury in support of the ruling requested taxpayer a represents that he received a distribution from ira x totaling amount taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to an error made by an employee of financial_institution a taxpayer a further represents that amount has not been used for any other purpose prior to engaging in the transactions described below taxpayer a maintained ira x at financial_institution b in taxpayer a began considering whether to roll over his retirement_funds into a new ira at financial_institution a employee the chief investment officer of financial_institution a and a chartered financial analyst informed taxpayer a that he could transfer his retirement_funds to an ira at financial_institution a and that financial_institution a could act as custodian of the ira employee was mistaken-financial institution a was not qualified to serve as an ira custodian financial_institution a submitted documentation admitting its error on date taxpayer a directly transferred amount from ira x to financial_institution a no federal taxes were withheld the documents issued in connection with taxpayer a's transfer indicated that the funds were intended to be held in an ira at financial_institution a in irs audited taxpayer a on an unrelated issue during the course of the audit the irs examiner discovered that financial_institution a was not qualified to serve as ira custodian taxpayer a’s accountant did not uncover the mistake prior to the audit taxpayer a's funds continue to remain invested in financial_institution a he has not withdrawn or spent any of the distributed funds based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount sec_408 of the code provides that except as otherwise provided in section - d any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 sec_408 of the code defines and provides the rules applicable to ira -rollovers sec_408 of the code provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount other than an ira for the benefit of which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers - sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 related to required minimum distributions under sec_401 and incidental death_benefit requirements of sec_401 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a are consistent with his assertion that the failure to accomplish a timely rollover was caused by an error made by an employee of financial_institution a therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount into a rollover ira provided all other requirements of sec_408 except the 60-day requirement are met with respect to such contribution amount will be considered a rollover_contribution within the meaning of sec_408 this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact at please address all correspondence to se t ep ra t2 sincerely your on lene manager ja employeé plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc kee kak ka r cc kerex xk e x ke zk e