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Third Circuit Affirms Advance Payment Was Income, Not a Loan
The U.S. Court of Appeals for the Third Circuit today issued a decision affirming the Tax Court’s characterization of a payment received by the taxpayer as income because the transaction was an advance payment, and not a loan.
Karns Prime & Fancy Food, Ltd. v. Commissioner, No. 06-1031 (3d Cir. July 20, 2007).
In today’s decision, the Third Circuit stated its disagreement with the Ninth Circuit’s decision in
Westpac Pacific Food v. Commissioner, 451 F.3d 970 (9th Cir. 2006).
For an electronic version of the decision (including concurring and dissenting opinions):
Karns
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The taxpayer’s principal supplier entered into an agreement with the taxpayer for $1.5 million. The taxpayer agreed to pay the note in six annual payments of $250,000. The agreement provided that if the taxpayer met the supply requirement for the previous calendar year by purchasing a stipulated amount of products, the $250,000 for that year would be forgiven. The taxpayer reported the note on its books as a long-term note payable, and the supplier recorded the note as an asset and amortized the note monthly over the six-year period.
For the year at issue, the IRS issued a deficiency to the taxpayer for its failure to include the $1.5 million payment as income on its tax return. The Tax Court concluded that the payment was not a loan, and was includible in the taxpayer’s gross income.
The Third Circuit affirmed the Tax Court’s opinion.
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