Court Opinion

ID: 4335640
Source: CourtListenerOpinion
Date Created: 2018-11-14 02:22:02.508751+00
Date Added: 2024-06-11T14:47:00.758402
License: Public Domain

KARNS PRIME & FANCY FOOD, LTD., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentKarns Prime & Fancy Food, Ltd. v. Comm'rNo. 906-04 United States Tax CourtT.C. Memo 2005-233; 2005 Tax Ct. Memo LEXIS 232; 90 T.C.M. (CCH) 357; October 5, 2005, Filed *232 John D. Sheridan and Steven J. Schiffman, for petitioner.Gerald A. Thorpe, for respondent.  Chiechi, Carolyn P.Carolyn P. ChiechiMEMORANDUM FINDINGS OF FACT AND OPINIONCHIECHI, Judge: Respondent determined a deficiency of $ 486,355 in petitioner's Federal income tax (tax) for the taxable year ended January 30, 2000 (year at issue).The only issue for decision is whether the $ 1.5 million ($ 1.5 million at issue) that petitioner received from its principal supplier during the year at issue constitutes a loan that is not includable in its gross income. We hold that it does not.FINDINGS OF FACTSome of the facts have been stipulated and are so found.At the time of the filing of the petition in this case, petitioner's principal place of business was in Mechanicsburg, Pennsylvania.During the year at issue, petitioner, a corporation organized under the laws of Pennsylvania, operated several grocery stores in towns located around Harrisburg, Pennsylvania. During that year, Super Rite Foods, Inc. (Super Rite), one of petitioner's suppliers of grocery items since the 1970s, was petitioner's principal supplier.In 1998, Scott Karns (Mr. Karns), who at all relevant*233  times was petitioner's chief executive officer, concluded that petitioner needed $ 1.5 million for capital improvements. In that year, Mr. Karns approached Dale Conklin (Mr. Conklin), who was then president of Super Rite, to discuss obtaining financial assistance from Super Rite for petitioner's capital needs.At certain times during the relevant time period, certain of Super Rite's customers approached it seeking some form of financial assistance (e.g., an advance of funds, a lease guaranty, a supply agreement commitment). Although Super Rite preferred that its customers obtain financial assistance from outside sources, from time to time (around 10 to 15 times a year) it decided to provide some form of financial assistance to certain of its creditworthy and strategically important customers in order to help them meet their respective financial needs. The amount of funds that Super Rite was willing to advance to a customer depended upon Super Rite's estimate of its potential profit under the supply agreement that it required of such customer.Before Super Rite agreed to provide financial assistance to a customer, it required each such customer to (1) enter into a written supply agreement*234  (supply agreement) that, inter alia, required the customer to purchase annually a minimum amount of products and that contemplated that Super Rite would pay an advance price rebate to such customer at the inception of such supply agreement and (2) execute a promissory note (note) payable to Super Rite in the amount of any such advance rebate. Although Super Rite expected that the customer would satisfy the minimum annual purchase requirement set forth in the supply agreement, Super Rite nonetheless required the customer to execute a note payable to it in order to facilitate repayment of all or a portion of such advanced funds in the event that the customer did not satisfy such minimum annual purchase requirement or otherwise materially breached the supply agreement. 1 Super Rite intended that the customer's obligation to repay funds that it advanced would arise only if the customer materially breached the supply agreement.*235  While petitioner was negotiating with Super Rite with respect to the terms of the supply agreement and the corresponding note that Super Rite required as conditions to Super Rite's advancing any funds to it, petitioner requested, and received, permission from PNC Bank, petitioner's primary bank, to enter into such supply agreement and to execute such note. That is because petitioner had outstanding indebtedness to PNC Bank, and the loan documents with respect to that indebtedness required PNC Bank's permission before petitioner entered into any transaction in which it received an advance of funds that it might have to repay and/or with respect to which certain of petitioner's assets were to serve as collateral. In all events, PNC Bank was to retain a first security interest in any assets of petitioner that served as collateral with respect to petitioner's outstanding indebtedness to that bank. 2*236  As a result of negotiations between Mr. Conklin and Mr. Karns, Super Rite agreed to advance $ 1.5 million to petitioner and petitioner agreed to execute the supply agreement and the corresponding note required by Super Rite. 3 In agreeing to the $ 1.5 million advance to petitioner and to the terms of the supply agreement and the corresponding note that Super Rite required of petitioner, Super Rite had concluded, inter alia, that petitioner would be entitled to an estimated $ 1.5 million rebate under such supply agreement if petitioner did not materially breach that agreement. 4On April 16, 1999, petitioner executed the supply agreement (April 16, 1999 supply agreement) that Super*237  Rite required of petitioner as a condition to Super Rite's advancing $ 1.5 million to it. Petitioner also executed the corresponding $ 1.5 million note (April 15, 1999 note) 5 dated April 15, 1999, and payable to Super Rite that Super Rite also required of petitioner as a condition to Super Rite's advancing $ 1.5 million to it.Pursuant to the April 16, 1999 supply agreement, petitioner agreed to purchase annually from Super Rite $ 16 million in products over a six-year period. The April 16, 1999 supply agreement provided in pertinent part:   1. Supply of Requirements; Certification. Throughout the   term of this Agreement, Super Rite will be the principal   wholesaler for all products purchased by the Retailer   [petitioner] for sale in the Retailer's stores that are located   within the geographic*238  area served by Super Rite. Throughout the   term of this Agreement, the Retailer shall purchase at least  $ 16,000,000.00 of product from Super Rite each year of this   Agreement. * * *   2. Pricing and Payment Terms. During the term of this   Agreement, product pricing, fees, billing and payment terms,   returns and credits for products purchased, and other terms and   conditions governing the sale of products hereunder shall be   governed by Super Rite's general policies and practices in   effect from time to time. In addition, Retailer shall receive a   private label incentive to be determined on the basis of Exhibit   A attached hereto and further, Retailer fees for Grocery, Frozen   and Dairy shall be in accordance with Exhibit B attached   hereto. 6 The parties further agree that Retailer's   payment terms shall be seven (7) days. Failure by the Retailer   to make payment to Super Rite of amounts due for the delivery of   goods hereunder in accordance with the payment terms governing   any shipment of goods shall constitute a default hereunder and,   in addition to*239  its rights under Section 5 of this Agreement,   Super Rite may suspend shipments to the Retailer for so long as   such default remains uncured.   3. Term. This Agreement shall remain in full force and   effect until April 16, 2005. Thereafter, this Agreement shall   automatically be renewed for successive periods of one (1) year   each unless either party gives written notice to the other party   at least sixty (60) days prior to the expiration of the initial   term or any renewal term hereof that it desires to terminate   this Agreement at the end of such term.   4. Delays in Supply. Neither party hereto shall be liable   for any default or delay in the performance of its obligations   hereunder caused by any contingency beyond its control * * *. In   the event of a Delay that materially impairs Super Rite's   shipments to the Retailer or the Retailer's purchases from Super   Rite, the other party's obligations hereunder shall be reduced   for the period including the Delay in proportion to the   impairment and, in the case of a Delay affecting Super Rite, the   Retailer*240  shall be expressly permitted to cover such reductions   by purchases from other wholesalers (it being expressly   understood that Super Rite shall incur no liability to the   Retailer for any increased costs or expenses related thereto). *   * *   5. Cancellation by Super Rite. Super Rite may cancel this   Agreement: (i) upon the failure by the Retailer to make payment   to Super Rite in accordance with Section 2 hereof for goods   delivered hereunder; (ii) immediately upon the filing of a   petition for relief by the Retailer in a voluntary proceeding   under applicable federal or state bankruptcy law or like laws   for the protection of debtors or upon the application of the   Retailer to any court or administrative agency of competent   jurisdiction for the appointment of a receiver or trustee for   the administration of the Retailer's affairs; (iii) upon the   filing of a petition for relief with respect to the Retailer in   an involuntary proceeding under applicable federal or state   bankruptcy law or like laws for the protection of debtors or   upon the application*241  by a third party to any court or   administrative agency of competent jurisdiction for the   appointment of a receiver or trustee for the administration of   the affairs of the Retailer, if an order for relief shall be   entered and continued unstayed in effect for thirty (30) days or   such petition or application shall continue undismissed for   sixty (60) days; (iv) following the breach of any obligation of   the Retailer hereunder, if such breach is not cured within   thirty (30) days following notice thereof to the breaching   party; (v) following the default by Retailer in the performance   of or compliance with any material contract, instrument or   agreement, including, without limitation, any lease of real   property, any material lease of personal property or any   promissory note, instrument or agreement evidencing or in   respect of any indebtedness for borrowed money or any security   therefor, if such default is not cured within any applicable   period of grace, or (vi) immediately upon the occurrence of a   material adverse change in the condition (financial or *242    otherwise), business or prospects of the Retailer or any   guarantor of the Retailer's liabilities and obligations   hereunder. * * *   6. Cancellation by the Retailer. The Retailer may cancel   this Agreement: (i) immediately upon the filing of a petition   for relief by Super Rite in a voluntary proceeding under   applicable federal or state bankruptcy law or like laws for the   protection of debtors or upon the application of Super Rite to   any court or administrative agency of competent jurisdiction for   the appointment of a receiver or trustee for the administration   of Super Rite's affairs; (ii) upon the filing of a petition for   relief with respect to Super Rite in an involuntary proceeding   under applicable federal or state bankruptcy law or like laws   for the protection of debtors or upon the application by a third   party or [sic] any court or administrative agency of competent   jurisdiction for the appointment of a receiver or trustee for   the administration of the affairs of Super Rite, if an order for   relief shall be entered and continued unstayed in*243  effect for   thirty (30) days or such petition or application shall continue   undismissed for sixty (60) days; or (iii) following the breach   of any obligation of Super Rite hereunder, if such breach is not   cured within thirty (30) days following notice thereof to Super   Rite. * * *   7. Liquidated Damages. The parties understand that Super   Rite's commitment to supply the specified requirements of the   Retailer will require an allocation of resources by Super Rite   that would not be practical if the Retailer were to purchase   less than such specified percentage requirements from Super   Rite. The parties agree that the Retailer's failure to perform   its obligations hereunder will cause damage to Super Rite that   will be difficult or impossible to prove accurately and,   therefore, with the intention of providing a fair and reasonable   formula to calculate the amount of such damage, the parties   agree that upon Super Rite's cancellation of this Agreement   pursuant to Sections 2 or 5 of this Agreement, the Retailer will   pay Super Rite as liquidated damages*244  an amount equal to 1.0% of   the product of (i) the Retailer's aggregate purchases from Super   Rite during the preceding calendar year multiplied by (ii) the   number of years remaining in the term of this Agreement. The   amount of the Retailer's aggregate purchases and Super Rite's   damages for periods of less than one year shall be calculated on   a pro rata basis.   8. Pledge on Assets. As collateral security for the   prompt and complete payment and performance when due of all of   Retailer's liabilities and obligations to Super Rite hereunder,   Retailer hereby mortgages, pledges, hypothecates and grants to   Super Rite a lien and security interest in all right, title and   interest which Retailer may now or hereafter have in, to and   under the following, wherever located (collectively, the   "Collateral"): (i) all "Inventory", as such term is defined in  Section 9-106(4) of the Uniform Commercial Code * * * (the   "Code") * * *; (ii) all "Accounts" as such term is defined in  Section 9-106 of the Code * * *; (iii) all "Equipment" as such  *245  term is defined in Section 9-109(2) of the Code * * *; and (iv)   all "Proceeds" of the foregoing, as such term is defined in  Section 9-306(1) the Code [sic] * * *. Retailer covenants that   during the term of this Agreement it will not, without Super   Rite's prior written consent, create, incur, assume, or suffer   to come into existence any mortgage, pledge, lien or other   encumbrance upon any of the Collateral or the Proceeds thereof,   wherever located, now existing or hereafter acquired, other than   that granted to Super Rite hereunder. Retailer agrees to execute   and deliver such documents, and to take such action, as Super   Rite may request to perfect and continue Super Rite's lien on   and security interest in such Collateral. Provided,   however, Super Rite acknowledges that PNC Bank has first   place security interest on Retailer's equipment located at its'   [sic] West Shore Plaza Store.   8.1. Financial Statements. Retailer shall furnish to   Super Rite, no later than ninety (90) days after the end of each   fiscal quarter of Retailer, the internal statements*246  of Retailer   and every six months the reviewed balance sheet of Retailer,   together with its statement of income, retained earnings and   cash flow for the fiscal quarter. Each year, upon Retailer's   request, Super Rite shall provide Retailer with a letter   confirming the forgiveness of debt in accordance with that   Promissory Note, of even date herewith, 7 by and*247    between Super Rite and Retailer.   9. Coupon Redemption Service. During the term of this   Agreement, Retailer agrees to use Super Rite's coupon service   for the redemption of all coupons received by Retailer [and] to   pay for such service at the rates established by Super Rite from   time to time. 8The April 15, 1999 note provided in pertinent part:   FOR VALUE RECEIVED, KARNS PRIME & FANCY FOODS, LTD., * * * (the   "Borrower"), hereby promises to pay to the order of SUPER RITE   FOODS, INC., * * * (the "Lender"), * * * the principal sum of   ONE MILLION FIVE HUNDRED THOUSAND NO/100 DOLLARS   ($ 1,500,000.00). The Borrower hereby further promises to pay   interest on the unpaid principal balance hereof at a rate per   annum equal to the Prime Rate (as hereinafter defined) plus 1% *   * *. Interest shall accrue daily from the date hereof on the   unpaid principal balance hereof and shall be computed on the   basis of the actual number of days for which due.   The principal balance of this Note shall be repaid in six (6)   annual payments of $ 250,000.00 each, commencing on April 16,   2000, and continuing on the third Friday of each April   thereafter through and including April 16, 2005; *248  provided   however, that the payment of the annual payment shall be   forgiven by the Lender [Super Rite] if the Lender determines   that the Borrower is in compliance with, and shall not have   materially breached or then be in uncured default under, that   certain Supply and Requirements Agreement of even date   herewith 9 among the Borrower and Lender. The entire   unpaid and unforgiven principal balance hereof shall be due and   payable, if prior to April 16, 2005, Borrower ceases, for any   reason, to use Lender as its primary food supplier.   Notwithstanding the foregoing, the entire unpaid and unforgiven   principal balance hereof and accrued interest thereon shall be   due and payable on April 16, 2005.*249  Even though execution of the April 16, 1999 supply agreement and the corresponding April 15, 1999 note occurred in mid-April 1999, it was not until around May 4, 1999, that petitioner received the $ 1.5 million at issue. 10 Around that last date, Rich Foods, Inc. (Rich Foods), the then parent of Super Rite, gave petitioner a $ 1.5 million check drawn on Rich Foods' checking account.During the year at issue in August 1999, SUPERVALU, Inc. (SUPERVALU), acquired Rich Foods. SUPERVALU recorded the $ 1.5 million advanced to petitioner in SUPERVALU's fixed asset ledger as a supply rebate that was to be amortized over six years in monthly installments of $ 19,230.77. Petitioner recorded the April 15, 1999 note in its books and records as a long-term note payable.Petitioner expended $ 750,000 of the $ 1.5 million at issue*250  on capital improvements and temporarily invested the balance in certificates of deposit (CDs). Petitioner pledged the CDs as collateral for a $ 960,000 loan from PNC Bank. Petitioner used the $ 960,000 in PNC Bank loan proceeds for capital improvements.During the latter part of the year at issue, Mr. Karns concluded that it would be desirable to relocate one of petitioner's stores. As a result, he entered into negotiations to lease a new site for that store. The prospective lessor of that site refused to lease it to petitioner without a guaranty of petitioner's lease obligations.At all relevant times, SUPERVALU agreed to act from time to time as a guarantor of a customer's lease obligations where SUPERVALU concluded that to do so would serve SUPERVALU's business interests. Around January 25, 2000, SUPERVALU guaranteed petitioner's obligations under the lease (petitioner's lease) of the new site for one of petitioner's stores. In return for SUPERVALU's guaranty of petitioner's lease, on January 26, 2000, petitioner entered into several agreements with SUPERVALU, including: (1) An agreement that granted to SUPERVALU a security interest in certain of petitioner's assets; 11*252  (2) a*251  first amendment to the April 16, 1999 supply agreement that, inter alia, amended the term of that supply agreement 12 but that did not alter petitioner's annual purchase requirement under the April 16, 1999 supply agreement; (3) a retailer's agreement that (a) required SUPERVALU to make its product lines available to petitioner at certain prices and to provide petitioner with certain services, including field advisory, warehousing, and marketing services, and (b) required petitioner to comply with SUPERVALU's payment, accounting, inventory, and confidentiality requirements; (4) a mediation/arbitration agreement that required petitioner and SUPERVALU to resolve any controversy, claim, or dispute by mediation or arbitration; and (5) a reimbursement agreement that required petitioner to pay annually to SUPERVALU 10 percent of the petitioner's lease value. In addition, as was customary for SUPERVALU when it guaranteed one of its customer's lease obligations, SUPERVALU required petitioner to enter into an option agreement with SUPERVALU that gave SUPERVALU the right to take over petitioner's lease in the event that petitioner defaulted under it. 13On January 26, 2000, petitioner's officers, who were also stockholders of petitioner, executed an agreement in which they guaranteed various obligations that petitioner had to SUPERVALU and/or its subsidiaries. Such obligations included petitioner's obligations under the April 16, 1999 supply agreement and the corresponding April 15, 1999 note.Petitioner satisfied the annual purchase requirement set forth in the April 16, 1999 supply agreement for each of the*253  periods ended April 16, 2000, and April 16, 2001, and otherwise complied with, did not materially breach, and was not in uncured default under that supply agreement. 14 As a result, petitioner was not obligated to make on each of those dates the annual payment set forth in the April 15, 1999 note. In petitioner's books and records for each of the years ended January 30, 2001, and January 30, 2002, petitioner reduced by $ 250,000 the balance of its long-term notes payable. In each of petitioner's tax returns for those respective years, petitioner reported $ 250,000 as "Other Income -- Reduction of Supplier Note Agreement".*254  On March 9, 2001, petitioner executed a document entitled "COMMERCIAL NOTE" (March 9, 2001 commercial note) 15 payable to SUPERVALU in the amount of $ 300,000. On or about the same date, petitioner received a $ 300,000 check drawn on an account of SUPERVALU. The March 9, 2001 commercial note provided in pertinent part:   FOR VALUE RECEIVED, Karns Prime and Fancy Food Ltd. * * *   (collectively the "Maker"), promise[s] to pay to SUPERVALU * * *   ("Lender") * * * the principal sum of Three Hundred Thousand and   No/100 Dollars ($ 300,000.00), plus interest, all as set forth   below.   Interest upon all principal advanced under this Note shall   accrue, from the date of its advance and until repaid, at a rate   of ten and seven tenths percent (10.70%) per annum. * * *   Principal and interest due Lender under this Note shall be   payable as follows:     (a) A payment of Ninety One Thousand Five Hundred Two and     83/100 Dollars ($ 91,502.83), including principal and     accrued and unpaid interest, shall be due and payable on     March 9 2002; a payment of*255  Ninety One Thousand Five Hundred     Two and 83/100 Dollars($ 91,502.83), including principal and     acrued and unpaid interest, shall be due and payable on     March 9 2003; a payment of Ninety One Thousand Five Hundred     Two and 83/100 Dollars($ 91,502.83), including principal and     accrued and unpaid interest, shall be due and payable on     March 9 2004, a payment of Ninety One Thousand Five Hundred     Two and 83/100 Dollars($ 91,502.83), including principal and     accrued and unpaid interest, shall be due and payable on     March 9 2005; and     (b) The entire remaining principal balance, plus all     accrued and unpaid interest, shall be due and payable in     full on June 9, 2005.           *   *   *   *   *   *   *   This Note shall be IN DEFAULT and, at Lender's option, the total   unpaid principal under this Note, all accrued interest thereon   and all other amounts owed by any Maker to Lender, whether   evidenced by this Note or otherwise, shall be immediately*256  due   and payable, without notice, protest, or demand, upon the   occurrence of any one or more of the following events of   default: (a) the failure of any Maker to pay any amount when due   or to perform any other obligation as required under this Note;   (b) the occurrence of any default by any Maker or any future   guarantor (there presently being no guarantors) of this Note   (called a "Guarantor" below) under any other obligation to or   agreement with Lender or any SUPERVALU Entity (as defined   below), including any default by any Maker or any Guarantor   under any supply agreement in favor of any SUPERVALU Entity and   any failure by any Maker or any Guarantor to pay any open   account obligation to any SUPERVALU Entity; * * *   If this Note, any payment required to be made under this Note or   any other obligation payable to Lender or any SUPERVALU Entity   is not paid on the due date (whether at original maturity or   following acceleration), in addition to any other rights Lender   may have under this Note, any related agreement or under   applicable law, Lender*257  shall have the right to set off the   indebtedness evidenced by this Note against any indebtedness of   Lender or any SUPERVALU Entity to any Maker or Guarantor.   [Reproduced literally.]On March 9, 2001, petitioner and SUPERVALU also entered into a second amendment to the April 16, 1999 supply agreement (March 9, 2001 supply agreement second amendment). The March 9, 2001 supply agreement second amendment provided in pertinent part:   1. Purchase Requirement   Effective as of the Execution Date and continuing throughout the   term of the [April 16, 1999 supply] Agreement, Retailer   [petitioner] shall purchase at least $ 21,000,000 of product from   Wholesaler [Super Rite] each year of the Agreement.   2. Sales Rebate   As additional consideration*258  for Retailer's entering into this   Agreement, and provided no Retailer Entity is in default under   this Agreement or under any Capital Commitment or other   agreement with, or obligation to, any SUPERVALU Entity,   Wholesaler shall rebate to Retailer a rebate (the "Rebate"), on   the terms and conditions set forth below:     2.1 The purchases on which the Rebate shall be based (the     "Aggregate Purchases") shall be the total purchases of     Product from Wholesaler by Retailer for all of the     Supermarkets in the Aggregate, up to a maximum total of     Aggregate Purchases over the term of this Agreement of     $ 89,250,000.     2.2 The Rebate shall be calculated annually, based on the     Aggregate Purchases for the twelve month period immediately     preceding an anniversary of the Execution Date (the "Annual     Period").     2.3 The Aggregate Purchases for the Annual Period shall be     multiplied by four thousand three hundred sixty seven ten-     thousandths percent (.4367%), and*259  the product of such     calculation shall be the amount of the Rebate payable by     Wholesaler to Retailer for such Annual Period.     2.4 The amount of the Rebate shall be shown as a credit on     the first statement sent by Wholesaler to Retailer     following the end of the   Annual Period. Notwithstanding anything to the contrary which   may be contained in this Section 5, at such point, if any, that   the Aggregate Purchases reach $ 89,250,000, no further purchases   shall be considered Aggregate Purchases, and no Rebate shall be   due or payable with respect to any purchases which are not   considered Aggregate Purchases. Wholesaler may offset against   any Rebate any amounts owed to any SUPERVALU Entity by any   Retailer Entity, and Wholesaler shall discontinue paying the   Rebate altogether upon any default by any Retailer Entity under   this Agreement, under any Capital Commitment, or under any other   agreement with, or obligation to, any SUPERVALU Entity.   Wholesaler shall have no obligation whatsoever to pay any Rebate   in*260  the event any Retailer Entity commences any proceeding under   any bankruptcy, reorganization or similar law, or in the event a   similar proceeding is filed against any Retailer Entity.           *   *   *   *   *   *   *   4. Agreement Continues   Except as specifically amended herein, the Agreement continues,   unmodified, in full force and effect.For the annual period ended March 9, 2002, petitioner met the increase in petitioner's annual purchase requirement under the March 9, 2001 supply agreement second amendment, i.e., an increase of $ 5 million in required annual product purchases over the $ 16 million in required annual product purchases set forth in the April 16, 1999 supply agreement before its amendment by the March 9, 2001 supply agreement second amendment. (We shall refer to such $ 5 million increase as the $ 5 million increase in petitioner's annual purchase requirement.) As a result, petitioner earned under the March 9, 2001 supply agreement second amendment a sales rebate for the annual period ended March 9, 2002, in an amount equal to the annual payment for that period set forth in the March 9, 2001 commercial*261  note, and such rebate offset such annual payment. For the annual period ended March 9, 2003, petitioner did not meet the $ 5 million increase in petitioner's annual purchase requirement. As a result, petitioner earned under the March 9, 2001 supply agreement second amendment a sales rebate of $ 86,573.64 for the annual period ended March 9, 2003, which was $ 4,929.19 less than the annual payment for that period set forth in the March 9, 2001 commercial note. Such rebate offset $ 86,573.64 of such annual payment, and petitioner paid the balance of such annual payment (i.e., $ 4,929.19).On June 13, 2000, petitioner, which used the accrual method of accounting, timely filed Form 1120, U.S. Corporation Income Tax Return (petitioner's return), for its taxable year ended January 30, 2000. In that return, petitioner did not include the $ 1.5 million at issue in gross income.Respondent issued a notice of deficiency (notice) to petitioner with respect to the year at issue. In the notice, respondent determined that petitioner is required to include the $ 1.5 million at issue in gross income for that year.OPINIONAlthough respondent must have commenced respondent's examination of petitioner's*262  return for the year at issue after July 22, 1998, the parties do not address section 7491(a). 16 In any event, we need not decide whether the burden of proof shifts to respondent under that section. That is because resolution of the issue presented here does not depend on who has the burden of proof.The parties' sole dispute is whether the $ 1.5 million at issue constitutes a loan that is includable in petitioner's gross income for the year at issue.The determination of whether a transfer of funds constitutes a loan is a question of fact. Haber v. Commissioner, 52 T.C. 255">52 T.C. 255, 266 (1969), affd. per curiam 422 F.2d 198">422 F.2d 198 (5th Cir. 1970). In order for a transfer of funds to constitute a loan, at the time the funds are transferred there must be an unconditional obligation (i.e., an obligation that is not subject to a condition precedent) on the part of the transferee to repay, and an unconditional*263  intention on the part of the transferor to secure repayment of, such funds. Haag v. Commissioner, 88 T.C. 604">88 T.C. 604, 616 (1987), affd. without published opinion 855 F.2d 855">855 F.2d 855 (8th Cir. 1988); see also Frierdich v. Commissioner, 925 F.2d 180">925 F.2d 180, 185 (7th Cir. 1991), affg. T.C. Memo. 1989-393; Clark v. Commissioner, 18 T.C. 780">18 T.C. 780, 783-784 (1952), affd. per curiam 205 F.2d 353">205 F.2d 353 (2d Cir. 1953). Whether a transfer of funds constitutes a loan may be inferred from objective characteristics surrounding the transfer, including the presence or absence of a debt instrument, collateral securing the purported loan, interest accruing on the purported loan, repayments of the transferred funds, and any attributes indicative of an enforceable obligation to repay the funds transferred. See, e.g., Haag v. Commissioner, supra at 615-616 & n. 6. In determining whether a transfer of funds constitutes a loan, the substance, and not the form, of the transaction is controlling for tax purposes. See, e.g., Knetsch v. United States, 364 U.S. 361">364 U.S. 361, 365-366, 5 L. Ed. 2d 128">5 L. Ed. 2d 128, 81 S. Ct. 132">81 S. Ct. 132, 1961 C.B. 34">1961 C.B. 34, 1 C.B. 34">1961-1 C.B. 34 (1960).In support of its position that the $ 1.5 million at issue*264  constitutes a loan, petitioner argues:   The advance from Super Rite on April 15, 1999 created an   unconditional obligation to repay those funds. It was only a   condition subsequent, i.e. fulfilling the obligations under the   Supply and Requirements Agreement, on an annual basis, that gave   rise to the forgiveness of the annual debt service payment.           *   *   *   *   *   *   *   In the instant case, Petitioner has demonstrated that all the   indicia of a loan as well as a true creditor-debtor relationship   existed. A Promissory Note was signed * * *; the Note called for   interest on the unpaid balance at the rate of prime plus 1% * *   *; the Note was to be repaid in six annual payments of $ 250,000   each commencing on April 16, 2000 and continuing on the third   Friday of each April thereafter through and including April 16,   2005 * * * the Petitioner granted Super Rite a security interest   in (i) all inventory, (ii) all accounts, (iii) all equipment,   including without limitation, all machinery, equipment,   furnishings and fixtures*265  of any kind and nature and description,   and (iv) all proceeds of the foregoing * * *; Petitioner   recorded the $ 1.5 million Promissory Note as a long term note   payable * * *; at the time of the transaction, Petitioner   considered the $ 1.5 million as a loan * * *           *   *   *   *   *   *   *   There was no guarantee in April of 1999 that the Petitioner   would meet the purchase obligations or other obligations under   the Supply and Requirements Agreements for the ensuing six   years. Accordingly, there was no guarantee that the future debt   service payments would be forgiven. Without any guarantee that   Petitioner would be allowed to keep the funds, there is no   income from the loan unless and until such time a debt service   payment is forgiven. "In determining whether a taxpayer enjoys   'complete dominion' over a given sum, the crucial point is not   whether his use of the funds is unconstrained during some   interim period. The key is whether the taxpayer has some   guarantee that he will be allowed to keep the money." *266 C.I.R. v. Indianapolis Power & Light Company, 493 U.S. 203">493 U.S. 203, 107 L. Ed. 2d 591">107 L. Ed. 2d 591, 110 S. Ct. 589">110 S. Ct. 589.If Super Rite had filed for bankruptcy, the Supply and   Requirements Agreement could be canceled * * *. Had Super Rite   declared bankruptcy, they [petitioner] would have been under   default under the Supply and Requirements Agreement and   accordingly, all amounts due under the Note would have been   immediately due and payable. If the Petitioner was unable to   meet their payment obligations * * * under the Supply and   Requirements Agreement and such default remained uncured for a   period of 30 days, Super Rite could cancel the Agreement * * *   and as a result of such default, amounts due under the Note   would immediately become due and payable. [Reproduced   literally.]We turn first to petitioner's related arguments (1) that the $ 1.5 million advance by Super Rite to petitioner created an unconditional obligation on the part of petitioner to repay those funds and (2) that only a condition subsequent (i.e., compliance by petitioner with the April 16, 1999 supply agreement) gave rise to the forgiveness*267  of the annual payment set forth in the April 15, 1999 note. In advancing those arguments, petitioner relies on Erickson Post Acquisition, Inc. v. Commissioner, T.C. Memo 2003-218">T.C. Memo. 2003-218, and on the following language in the April 15, 1999 note:   The principal balance of this Note shall be repaid in six (6)   annual payments of $ 250,000.00 each, commencing on April 16,   2000, and continuing on the third Friday of each April   thereafter through and including April 16, 2005; provided   however, that the payment of the annual payment shall be   forgiven by the Lender [Super Rite] if the Lender determines   that the Borrower [petitioner] is in compliance with, and shall   not have materially breached or then be in uncured default   under, that certain Supply and Requirements Agreement [April 16,   1999 supply agreement] of even date herewith among the Borrower   and Lender. * * *If the form of the April 15, 1999 note were to control, such form would appear to support petitioner's arguments. However, we are not bound by the form of the April 15, 1999 note. See Knetsch v. United States, supra.*268  The substance of the bargain between petitioner and Super Rite at the time the $ 1.5 million at issue was transferred to petitioner governs our resolution of whether such transfer constitutes a loan. See id.Based upon our examination of the entire record before us, we find that the substance of the bargain between petitioner and Super Rite at the time of the transfer to petitioner of the $ 1.5 million at issue 17 was that petitioner's obligation for a given annual period to make the annual payment set forth in the April 15, 1999 note would not arise unless and until it materially breached the April 16, 1999 supply agreement with respect to such period. On that record, we find that at the time of the transfer to petitioner of the $ 1.5 million at issue petitioner did not have an unconditional obligation to make each of the annual payments set forth in the April 15, 1999 note. 18*270  We further find petitioner's reliance on Erickson Post Acquisition, Inc. v. Commissioner, supra, to be misplaced. That case is materially distinguishable from the instant case. In Erickson Post Acquisition, Inc., the Court found that, at the time the taxpayer received the funds in question, *269  the taxpayer had an unconditional obligation to repay the full amount of such funds and that "Not only was the transaction in form a loan but, under the circumstances of this case, that was also its substance." Erickson Post Acquisition, Inc. v. Commissioner, supra.Unlike the findings of the Court with respect to the obligation of the taxpayer in Erickson Post Acquisition, Inc., we have found that, at the time of the transaction at issue, the substance of that transaction was that any obligation of petitioner under the April 15, 1999 note did not arise unless and until there was a material breach by petitioner of the April 16, 1999 supply agreement and that petitioner did not have an unconditional obligation to make each of the annual payments set forth in the April 15, 1999 note. 19We turn now to petitioner's reliance on the statement in Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203">493 U.S. 203, 210, 107 L. Ed. 2d 591">107 L. Ed. 2d 591, 110 S. Ct. 589">110 S. Ct. 589 (1990), that "In determining whether a taxpayer enjoys 'complete dominion' over a given sum, * * * The key is whether the taxpayer has some guarantee that he will be allowed to keep the money." According to petitioner, *271     There was no guarantee in April of 1999 that the Petitioner   would meet the purchase obligations or other obligations under   the Supply and Requirements Agreements for the ensuing six   years. Accordingly, there was no guarantee that future debt   service payments would be forgiven. * * *           *   *   *   *   *   *   *   Even if one assumes that on the anniversary date the Petitioner   had met the purchase requirements under the Supply and   Requirements Agreement, there was still no guarantee that the   debt service payment would be forgiven because the Note required   "that the borrower is in compliance with, and shall not have   materially breached or then be an uncured default, under the   Supply Agreement" * * *.Petitioner's contentions in reliance on Commissioner v. Indianapolis Power & Light Co., supra, miss the point that the Supreme Court established in that case. The issue presented in Indianapolis Power & Light Co. was whether certain deposits that the taxpayer, a power company, received from its customers were income. In resolving that*272  issue, the Supreme Court analyzed whether the taxpayer enjoyed "complete dominion" over such deposits. The Supreme Court held that the taxpayer did not have "complete dominion" over the deposits in question because it did not have "some guarantee" that it would be allowed to keep them. Id. According to the Supreme Court, by making timely payments of their respective utility bills, the customers, and not the taxpayer, controlled whether the taxpayer would be required to return the deposits that it received from such customers. Id. at 209. In contrast to the situation presented in Indianapolis Power & Light Co., Super Rite did not have control over the events that petitioner asserts would have constituted a material breach by it of the April 16, 1999 supply agreement and that would have required petitioner to repay a portion or all of the $ 1.5 million at issue that it received from Super Rite. 20*274  See id.; see also Herbel v. Commissioner, 106 T.C. 392">106 T.C. 392, 416-417 (1996), affd. 129 F.3d 788">129 F.3d 788 (5th Cir. 1997). On the record before us, we find that petitioner had "some guarantee" that, for each annual period covered by the April 16, 1999 supply agreement*273  and the corresponding April 15, 1999 note, it would be allowed to keep the amount of the annual payment set forth in that note as long as, for each such period, it lived up to its end of the bargain by not materially breaching the April 16, 1999 supply agreement. 21 See Commissioner v. Indianapolis Power & Light Co., 493 U.S. at 209, 212; Herbel v. Commissioner, supra.Based upon our examination of the entire record before us, we find that the $ 1.5 million at issue does not constitute a loan. On that record, we further find that that amount is includable in petitioner's gross income for the year at issue.We have considered all of the contentions and arguments of the parties that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot.To reflect the foregoing,Decision will be entered for respondent.  Footnotes1. Even in a situation where a customer of Super Rite did not seek an advance of funds from Super Rite, Super Rite may have agreed to enter into a supply agreement with such customer that, inter alia, required the customer to purchase annually a minimum amount of products and that contemplated that Super Rite would pay an advance price rebate to such customer at the inception of such supply agreement. Before Super Rite entered into such a supply agreement, it required the customer to execute a note payable to Super Rite in the amount of any such advance rebate in order to facilitate repayment of such advanced funds in the event that the customer did not satisfy the minimum annual purchase requirement set forth in the supply agreement or otherwise materially breached that agreement.↩2. The supply agreement between petitioner and Super Rite (discussed below) provided that PNC Bank was to have a first security interest in certain equipment that was described in that agreement as collateral with respect to petitioner's obligations under the supply agreement.↩3. Prior to agreeing to enter into a supply agreement with Super Rite, petitioner did not have a supply agreement with that supplier.↩4. Prior to agreeing to enter into a supply agreement with Super Rite, petitioner did not receive any price rebates from Super Rite with respect to its purchase of products from that supplier.↩5. By using the term "April 15, 1999 note", we do not intend to suggest that for tax purposes there was a loan by Super Rite to petitioner that was evidenced by that document.↩6. Prior to the April 16, 1999 supply agreement, Super Rite (1) did not provide petitioner with any incentives for private label purchases and (2) charged petitioner fees higher than those set forth in exhibit B attached to that supply agreement.↩7. The April 16, 1999 supply agreement referred to the April 15, 1999 note as a note of "even date". The record does not clarify the inconsistency between the date of that note to which the supply agreement referred (i.e., Apr. 16, 1999) and the date of that note to which such note referred (i.e., Apr. 15, 1999). What is clear from the record is that the April 16, 1999 supply agreement and the April 15, 1999 note were entered into around the same time and were interdependent. See infra note 9.↩8. Prior to the April 16, 1999 supply agreement, petitioner was not entitled to Super Rite's coupon redemption service.↩9. The April 15, 1999 note referred to the April 16, 1999 supply agreement as a supply agreement of "even date". The record does not clarify the inconsistency between the date of that supply agreement to which the note referred (i.e., Apr. 15, 1999) and the date of that supply agreement to which such supply agreement referred (i.e., Apr. 16, 1999). What is clear from the record is that the April 15, 1999 note and the April 16, 1999 supply agreement were entered into around the same time and were interdependent. See supra note 7.↩10. The record does not explain why petitioner did not receive until May 4, 1999, the $ 1.5 million to which the April 16, 1999 supply agreement and the corresponding April 15, 1999 note pertained.↩11. Around early February 2000, SUPERVALU filed financing statements with Cumberland County, Pa., and the Pennsylvania secretary of state in order to perfect the security interest in certain of petitioner's assets that petitioner granted to SUPERVALU on Jan. 26, 2000.↩12. The first amendment to the April 16, 1999 supply agreement provided in pertinent part:   The term of the [April 16, 1999 supply] Agreement is hereby   amended such that Retailer's [petitioner's] obligations under   this Agreement shall continue in effect for the longer of (a)   five (5) years from the Execution Date, or (b) as long as any   Capital Commitment [i.e., any capital committed by SUPERVALU for   the benefit of petitioner] remains outstanding.↩13. It has been SUPERVALU's practice to take over customer leases that it guaranteed where its customers were in default under them.↩14. Instead of discussing whether petitioner complied with, materially breached, and/or was in uncured default under the April 16, 1999 supply agreement, for convenience, we shall discuss only whether petitioner was in material breach of or materially breached that supply agreement. However, our references to whether petitioner was in material breach of or materially breached the April 16, 1999 supply agreement are intended also to pertain to whether petitioner complied with and/or was in uncured default under that supply agreement.↩15. By using the term "March 9, 2001 commercial note", we do not intend to suggest that for tax purposes there was a loan by SUPERVALU to petitioner that was evidenced by that document.↩16. All section references are to the Internal Revenue Code in effect for the year at issue.↩17. Although the April 15, 1999 note is dated Apr. 15, 1999, it was not until around May 4, 1999, that petitioner received the $ 1.5 million at issue. See supra note 10.↩18. We have found, based on the testimony of Joseph Della Noce (Mr. Della Noce), an officer of Rich Foods, the parent of Super Rite at the time of the transaction at issue, that Super Rite expected that the customer would satisfy the minimum annual purchase requirement set forth in the supply agreement, but that Super Rite nonetheless required the customer to execute a note payable to it in the amount of any advanced funds in order to facilitate repayment of all or a portion of such funds in the event that the customer did not satisfy such minimum annual purchase requirement or otherwise materially breached the supply agreement. We have also found, based on Mr. Della Noce's testimony, that Super Rite intended that the customer's obligation to repay funds that it advanced to such customer would arise only if the customer did not satisfy the minimum annual purchase requirement set forth in the supply agreement or otherwise materially breached that agreement.↩19. On the record before us, we reject petitioner's argument that certain alleged loan transactions between it and SUPERVALU that occurred after Super Rite advanced the $ 1.5 million at issue to petitioner (subsequent transactions) support its position that the $ 1.5 million at issue constitutes a loan. Assuming arguendo that we had found that the subsequent transactions constitute loans, those subsequent transactions do not control whether at the time petitioner received the $ 1.5 million at issue petitioner had an unconditional obligation to make each of the annual payments set forth in the April 15, 1999 note. See Haag v. Commissioner, 88 T.C. 604">88 T.C. 604, 616 (1987), affd. without published opinion 855 F.2d 855">855 F.2d 855↩ (8th Cir. 1988).20. According to petitioner, it would have materially breached the April 16, 1999 supply agreement upon the occurrence of any of the following events set forth in paragraph 5 of that supply agreement:   (i) upon the failure by the Retailer to make payment to Super   Rite in accordance with Section 2 hereof for goods delivered   hereunder; (ii) immediately upon the filing of a petition for   relief by the Retailer in a voluntary proceeding under   applicable federal or state bankruptcy law or like laws for the   protection of debtors or upon the application of the Retailer to   any court or administrative agency of competent jurisdiction for   the appointment of a receiver or trustee for the administration   of the Retailer's affairs; (iii) upon the filing of a petition   for relief with respect to the Retailer in an involuntary   proceeding under applicable federal or state bankruptcy law or   like laws for the protection of debtors or upon the application   by a third party to any court or administrative agency of   competent jurisdiction for the appointment of a receiver or   trustee for the administration of the affairs of the Retailer,   if an order for relief shall be entered and continued unstayed   in effect for thirty (30) days or such petition or application   shall continue undismissed for sixty (60) days; (iv) following   the breach of any obligation of the Retailer hereunder, if such   breach is not cured within thirty (30) days following notice   thereof to the breaching party; (v) following the default by   Retailer in the performance of or compliance with any material   contract, instrument or agreement, including, without   limitation, any lease of real property, any material lease of   personal property or any promissory note, instrument or   agreement evidencing or in respect of any indebtedness for   borrowed money or any security therefor, if such default is not   cured within any applicable period of grace, or (vi) immediately   upon the occurrence of a material adverse change in the   condition (financial or otherwise), business or prospects of the   Retailer or any guarantor of the Retailer's liabilities and   obligations hereunder. * * *↩21. On the record before us, we reject petitioner's contention that if Super Rite had commenced a bankruptcy proceeding, petitioner would have been in default under the April 16, 1999 supply agreement. Pursuant to the April 16, 1999 supply agreement, the commencement of a bankruptcy proceeding by Super Rite merely would have granted petitioner the option of canceling the April 16, 1999 supply agreement. Thus, it was within the control of petitioner, and not Super Rite, to cancel that supply agreement in the event that Super Rite were to commence a bankruptcy proceeding.↩