Suzy's Zoo (R) v. Commissioner of Internal Revenue

Suzy’s Zoo appeals from the U.S. Tax Court, challenging a deficiency finding for its tax year ending June 30, 1994. The Tax Court held that Suzy’s Zoo exercised such degree of control over the manufacturing of its products by third party contractors that it was a “producer” under Internal Revenue Code (“I.R.C.”) § 263A, and that it did not qualify for the small reseller exception of I.R.C. § 263A(b)(2)(B) and could not deduct its production costs. The Tax Court also held that the “year of change” under I.R.C. § 481(a) was the first taxable year (1994) in which Suzy’s Zoo changed its method of accounting to conform to I.R.C. § 263A. We have jurisdiction under I.R.C. § 7482(a)(1), and we affirm.

BACKGROUND

Suzy’s Zoo is a California corporation, owned 84% by its founder Suzy Spafford. Suzy’s Zoo is in the business of social expression, creating cartoon characters that are imprinted on its greeting cards, stationery, and various other products. Its principal customers are card and gift shops, and its most popular product is greeting cards. Its revenues largely derive from sales of its products to retail stores through independent sales agents who receive a commission. The remainder…