TaxNewsFlash-Cooperatives

July 3, 2008
No. 2008-13

IRS Concludes Purchase Followed by Repayment of Spread Between List Price and Discount Price Qualifies as Single Transaction

A recently released IRS Chief Counsel Memorandum concludes the step-transaction doctrine applies to the following situation: Payment by US OpCos of the full list price of merchandise, followed by repayment to each US OpCo of the difference between the full list price and the negotiated discount price (the spread). The IRS found that these steps are to be treated as a single transaction. CCM 200826004 (dated February 26, 2008, and released June 27, 2008).

For an electronic version of the three-page IRS memo: 200826004

Summary

US OpCos paid the full list price of merchandise followed by the repayment to each US OpCo of the spread between the full list price and the negotiated discount price.

The IRS noted that the US OpCos paid the full list price of merchandise only as a component part of a single overall transaction, which included the repayment to each US OpCo of the difference between the full list price and the negotiated discount price. All parties—including the OpCo, the Supplier, and the Parent—knew the precise bottom-line price of each item on the day the order was placed.

The taxpayer stated that the implementation of its ordering system was largely driven by a desire to reduce costs to the OpCos. Higher volume of centralized ordering would result in deeper discounts; thus, the taxpayer acted to induce the OpCos to place more centralized orders. Thus, the taxpayer’s ordering system provided each OpCo with accurate, real-time pricing information to enable the OpCos to compare the benefits of centralized ordering vs. independent purchases. The OpCos understood that their actual costs of goods sold (COGS) would be the negotiated discount price—not the list price.

The IRS found that the facts at issue appear to satisfy application of the step-transaction doctrine, in that the doctrine applies as long as the criteria of one of the tests are satisfied.

For more information, contact KPMG’s National Director of Cooperative Tax Services:

Teree Castanias, in Sacramento, (916) 554-1146, tcastanias@kpmg.com

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