City of Bethel, Alaska, and Community Liquor Sales, Inc. v. United States

This is an appeal from a tax refund action brought by City of Bethel, Alaska (Bethel), and Community Liquor Sales, Inc. (CLS). After a bench trial, the district court found that the revenue in question was exempt from federal income tax under section 115(a) of the Internal Revenue Code of 1954. We reverse because the revenue had not accrued to Bethel and therefore was taxable income to CLS.

FACTS

For years Bethel has been plagued with alcohol-related problems. In 1965 the citizens of Bethel voted to prohibit the sale of alcohol in the City. The problems continued, however, for alcohol purchased legally elsewhere was readily available in Bethel. In 1966 the citizens voted to end prohibition.

To control the sale of alcohol, CLS was incorporated and licensed as the sole licit supplier of alcohol in Bethel. CLS was a nonprofit corporation managed by three trustees, all of whom served at the pleasure of the Bethel City Council. The Articles of Incorporation expressly denied to the corporation the power to issue stock and declare dividends. CLS’s profits, with minor exceptions, were retained to purchase inventory until CLS was dissolved in 1973 when the citizens again voted to…