Opinion ID: 489588
Heading Depth: 2
Heading Rank: 2

Heading: Net Proceeds From Palomate Fruit Sales

Text: 20 The Tax Court determined that Palomate Storage Inc. was a mere conduit through which P.R. Farms marketed fruit. We will not reverse the Tax Court's determination that Palomate was a mere conduit in the absence of clear error. Stewart v. C.I.R., 714 F.2d 977, 992 & n. 17 (9th Cir.1983). 21 The incidence of taxation depends upon the substance of a transaction.... A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. Commissioner v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981 (1945). We will not treat an entity as a conduit if 1) parties to transactions respect formal distinctions between the entity and others, 2) the entity exists for a valid business purpose, and 3) the transaction in question is incident to the entity's business. Stewart, 714 F.2d at 988. Transfers of income within a family warrant special scrutiny. See Helvering v. Clifford, 309 U.S. 331, 335, 60 S.Ct. 554, 556, 84 L.Ed. 788 (1940); Royster v. C.I.R., 1985 T.C.M. 258. 22 The record amply supports the Tax Court's characterization of Palomate as a conduit for P.R. Farms' income. Palomate served no real economic function in the storage and marketing of P.R. Farms' fruit. We now review the evidence supporting the Tax Court's characterization of Palomate as a conduit. 23 Although Palomate was formed for the purpose of storing and packing P.R. Farms' fruit, Palomate owned no packing or storage facilities. Instead, P.R. Farms built its own $800,000 cold storage facility. Palomate dealt only with P.R. Farms and GFS. P.R. Farms dealt only with Palomate and GFS. 24 Palomate sold its fruit under the P.R. Farms label. Palomate never used its own Alta Sierra label. If, as P.R. Farms asserts, Ricchiuti was unwilling to assume the risks of Palomate's late-season sales strategy, he would not have allowed Palomate to market fruit purchased from P.R. Farms under the P.R. Farms label. Fruit that was damaged by long term cold storage would harm P.R. Farms' reputation if sold under the P.R. Farms label. 25 Palomate did not pay P.R. Farms for cold storage of fruit sold to Palomate. P.R. Farms claims that the cost of cold storage was included in the price Palomate paid for P.R. Farms' fruit. However, the prices Palomate paid for P.R. Farms' fruit were based on average sales prices published by Federal-State Market News Service. These were prices for fruit delivered immediately, not for fruit kept in cold storage for an indefinite period. In addition, P.R. Farms paid for all repacking of fruit in cold storage, even though Palomate allegedly bore responsibility for repacking necessitated by deterioration during storage. 26 Although Ricchiuti's son served as president of Palomate, Ricchiuti took an active role in controlling GFS' sales of Palomate fruit. In addition, both Ricchiuti and his son monitored fruit in cold storage and determined when to market each crop. 27 During the four years in question, Ricchiuti's son received a salary for his services as president of Palomate only once. His compensation for that year was $10,000. In contrast, P.R. Farms regularly paid Ricchiuti's son a substantial salary for managing P.R. Farms' cold storage facility. No other directors, officers or employees of Palomate were compensated. 28 Ricchiuti investigated customer complaints and determined when fruit was no longer to be sold to certain buyers. The record does not indicate that Ricchiuti's son performed any similar function on behalf of Palomate. 29 Although Palomate sustained losses on many individual transactions (see Reply Brief, Appendix A), gains on numerous other transactions more than offset losses. Palomate never sustained a net loss over any of the years in question. On one occasion, Palomate failed to pay P.R. Farms approximately $100,000 for fruit sold in 1974. Although this mistake may have been inadvertent, it is unlikely that parties conducting business at arm's length would fail to notice and correct an error of such magnitude. 30 Based on this record, we cannot say that the Tax Court's determination that P.R. Farms bore the ultimate risk of loss on fruit sales was either illogical or implausible. See Anderson v. City of Bessemer City, 470 U.S. 564, 577, 105 S.Ct. 1504, 1513, 84 L.Ed.2d 518 (1985). Accordingly, we hold that the Tax Court did not err in treating Palomate as a conduit. 31