No, I haven’t been working on transitioning this my blog to film reviewing, in anticipation of next month’s seven week Tax Court shutdown. This is the story of CA’s biggest tomato processing companies, which process 25% of CA’s tomato crop, and 40% of America’s tomato paste. The next slice of Papa John’s into which you bite (or, if you’re lucky, a slice of shroom and sausage from Mama’s Too on Broadway) may contain some of the 100 days’ run from The Morning Star Packing Company, L.P., The Morning Star Company, Tax Matters Partner, et al., 2020 T. C. Memo. 142, filed 10/14/20.  

The CA tomato run goes from July to October, 24/7, and what Morning Star and the als processes gets sold between August of the current year and October of the next year.

If you really want to know how those eight great tomatoes got into that itty bitty can, read Judge Mary Ann (“S.E.C. = She Eschews Cognomens”) Cohen’s three-and-a-half page dissertation. But the bottom line is that, after the end of the Year One’s pasting, an extensive clean-up must be done between the end of Year One and the start of the Year Two run. Sterility is the key, and there is no redundancy and no alternate business; if the tomato line gets contaminated with any kind of bacterium, all the inline stuff must be dumped, the line cleaned at huge expense, inspected by USDA and CADA, the farmers paid for their crops, and Morning Star is in breach of the covenants in its credit lines, and in its contracts to deliver the processed tomato stuff.

Morning Star writes off its post-run clean-up costs in Year One, although the work takes place in Year Two. IRS claims Section 461(h)(3) economic performance, the third link in the accrual chain, is broken thereby, and Judge S. E. C. Cohen buys it.

“Respondent has conceded that the partnerships determined the accrued production costs with reasonable accuracy and that they complied with the economic performance requirement. However, respondent contends that the accrued production costs consisted of bilateral contracts for goods and services to recondition the partnerships’ manufacturing facilities that were provided to and paid for by the partnerships after the December 31 close of their tax year.” 2020 T. C. Memo. 143, at p. 15.

 Morning Star claims the credit line documents and their contracts to deliver do constitute sufficiently binding obligations to constitute economic performance, and there is some caselaw to that effect, but Morning Star’s deals aren’t sufficiently specific to make the grade.

“The credit agreements involved in these cases do not specifically set forth the partnerships’ obligations to provide a comparably sufficiently fixed and definite basis. Instead the credit agreements include nonspecific text and generalized obligations. The agreements merely require that the partnerships ‘maintain all material licenses, Permits, [and] governmental approvals’, comply with ‘all laws’, and ‘keep all property useful and necessary in its business in good working order and condition’. The credit agreements neither specify which laws or regulations must be complied with nor identify exactly which property must be kept in good working order. Accordingly, we conclude that the generalized obligations found in the credit agreements do not establish the fact of the partnerships’ liabilities for the accrued production costs for the years in issue.

“The partnerships alternatively assert that their multiyear production contracts with various customers establish the fact of their liabilities for the accrued production costs. While these production contracts involve extensive product quality specifications, the partnerships’ efforts to comply with their customers’ specifications are production-run specific. Such compliance necessarily takes place before and during the production run of tomato products for a given customer. The accrued production costs in issue were for goods and services provided after the production run in each year in issue. Furthermore, the parties have stipulated that the accrued production costs in issue are to restore, rebuild, and retest the manufacturing facilities for use during the next production cycle. We conclude that the partnerships’ multiyear production contracts fail to establish the fact of the liabilities for the accrued production costs for the years in issue.” 2020 T. C. Memo. 143, at pp. 17-18.

Morning Star gets crushed (sorry, guys).

Of course, my super-sophisticated readers have said, “why not use a fiscal year, 10/1 to 9/30? No write-off issues then, and substantial business reasons.” Well, Judge S. E. C. Cohen’ll tell you why not. “Each has a calendar yearend for tax purposes because it is required to have the same yearend as its majority interest partner.” 2020 T. C. Memo. 143, at p. 3. And Section 706.