Cheesecake Factory Seeks Redetermination of Tax Deficiencies

a. Respondent erred in partially disallowing Petitioner's deduction under section 199 of the U.S. Internal Revenue Code of 1986, as amended, (the "Code") for each of the 2010, 2014 and 2012 Tax Years. Specifically:

b. Even if Respondent were correct in its assertion that Petitioner engaged in the activity of preparing individual slices of cheesecake at its retail restaurant facilities. Respondent erred in not recognizing any such preparation activities as de minimis and therefore properly disregarded in the determination of Petitioner's domestic production gross receipts (“DPGR”) under Treas. Reg. § 1.199-1(d)(3). Specifically:

c. Even if Respondent were correct in its assertion that Petitioner prepared individual slices of cheesecake at its retail restaurant facilities and that such preparation was more than de minimis. Respondent erred in its allocation of revenue received from the sale of individual slices of cheesecake between amounts constituting DPGR and non-DPGR. Specifically:

d. As a result of the errors described above in Paragraph 4.a-4.c of this Petition, Respondent erred in increasing Petitioner's federal income tax liability by $815,156 for the 2010 Tax Year, $973,327 for the 2011 Tax Year, and $1,045,568 for the 2012 Tax Year.

a. The overpayment alleged in this Paragraph 5 results from an overallocation of expenses incurred at Petitioner's retail restaurant facilities to the portion of its revenue properly treated as DPGR.

a. Petitioner, through its subsidiaries, conducts the business of producing cheesecakes in the United States and selling the cheesecakes that it produces. The revenues and expenses taken into account by Petitioner on its tax returns in determining the deductions pursuant to section 199 of the Code are attributable to the actual conduct of Petitioner's business.

b. CFRI, directly or through its subsidiaries and affiliates, owns and operates restaurants throughout the United States under the trademark names of The Cheesecake Factory®, Grand Lux Cafe®, and RockSugar Southeast Asian Kitchen®. CFBI owns and operates two bakeries, one located in California and another in North Carolina, in which it produces cheesecakes and other dessert products ("Cakes”) that it supplies to CFRI and unrelated other customers. CFRI and CFBI are wholly-owned subsidiaries of CFI. Furthermore, CFI has entered into licensing agreements with unrelated parties allowing them to own and operate The Cheesecake Factory restaurants outside the United States.

c. The Cakes are tangible personal property which is produced in whole or, in significant part within the United States by Petitioner, Petitioner derived the QPAI amounts listed on its tax returns from its sales of the Cakes.

d. The Cakes all leave the bakeries frozen after being fully baked. Most Cakes are pre-sliced by machines at the bakery (generally into 12 slices) with wax paper inserted between the slices. Although the Cakes are generally sold at the CFRI restaurants, they are prepared at the CFBI bakeries and leave the bakeries as finished products.

e. At CFRI restaurants, cheesecakes and other desserts produced by CFBI can be purchased whole at the restaurant's bakery counter (sliced or unsliced, depending on size), as a half cake, or as an individual slice. Individual slices can be purchased for dine-in or to take out.

f. There is no price difference between dine-in slices and take-out slices or between dine-in cakes and take-out cakes. Some customers order dine-in or takeout slices without garnish or whipped cream. There is no price difference between slices sold with and without garnish or whipped cream.

g. The QPAI, as filed on Petitioner's tax returns for the years at issue, subject to the affirmative, claim noted in Paragraph 5 above, accurately reflects the excess of Petitioner's DPGR for each year over the sum of the cost of goods sold that are allocable to such receipts, and other expenses, losses, or deductions (other than the deduction provided by section 199 of the Code), which are properly allocable to such receipts.

h. Petitioner's W-2 wages, within the meaning of section 199, were $36,443,230 for the 2010 Tax Year, $37,659,455 for the 2011 Tax Year and $38,071,683 for the 2012 Tax Year.

i. Petitioner, on its returns as filed, allocated 2 percent to 4 percent of the gross receipts from the dine-in and to-go sales of individual slices of cheesecake as non-DPGR. This allocation reflected the de minimis average cost of whipped cream and garnish added by the restaurants as a percentage of the cost of the cheesecake slices sold, even though individual guests were not charged for these extras or given discounts for forgoing them.