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any relevant period. Pertinax's rent expense was not charged
separately to its three corporate partners, but was absorbed in
the 10 to 11 percent markup added to the costs that Pertinax
invoiced to the partners. Mr. Munro reported $128,160 in rental
income from the El Centro property on his 1987 U.S. Individual
Income Tax Return.
Mr. Munro's Working Conditions and Responsibilities
In 1986 and 1987, Mr. Munro had a house in San Marino,
California, about 5 miles from the El Centro property. However,
he generally lived at another house in Santa Barbara, California,
about 75 miles from the El Centro property.
If Mr. Munro was not in the office on a particular business
day, a designated executive of Pertinax called him at the end of
the day to report on the day's business activities and to obtain
operating instructions for the following day or days. Mr. Munro
would give specific directions about what should be done
regarding current sales, cash management, sales with interesting
indications about the current market, and sometimes employee
matters. A typical conversation would last between 10 and 30
minutes. In 1986 and 1987, Mr. Brewer coordinated sales
activities, carried out Mr. Munro's policy directives governing
marketing practices, gross profit margins, how competitive to get
with a particular contractor, and so on, and conducted the daily
telephone conversations with Mr. Munro. Mr. Munro made the final
policy decisions for Pertinax and the other entities, including
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