24
It is determined that you incurred management service
fees of $332,717.00 in lieu of the $1,239,596.00
reported on your return for the tax year ended June 30,
1987. The adjustment of $906,879.00 results from the
disallowance of amounts paid by you to Pertinax,
Limited * * *, for management services provided to the
taxpayer by Pertinax. This adjustment is made because
you have failed to establish that the amounts paid were
incurred, or if incurred, were paid by you during the
taxable year for ordinary and necessary business
purposes; or that actual management services were
provided for the fees paid. [Emphasis added.]
Finally, with respect to wage expenses, the notice states:
It is determined that you incurred wage expense on your
tax return of $687,167.00 in lieu of the $1,571,315.00
reported on your return for the tax year ended June 30,
1987. The adjustment of $884,148.00 results from the
disallowance of amounts paid by you to Pertinax,
Limited * * *, and deducted by you as reimbursement for
the wages paid to the officers of this corporation who
were classified as employees of Pertinax, Limited.
This adjustment is made because you have failed to
establish that the amounts paid were incurred, or if
incurred, were paid by you during the taxable year for
ordinary and necessary business purposes, or that the
individuals classified as employees of Pertinax were
not, in fact, employees of this taxpayer corporation
under the provisions of the Internal Revenue Code.
[Emphasis added.]
The notice to Edco contains substantially identical language.
Respondent's answers, filed on July 11 and July 26, 1991,
implicitly not only deny that these three categories of payment
were fair and reasonable, but also that they were even incurred.
Respondent's trial memoranda for the Alondra and Edco cases made
clear that respondent was going to require petitioners to
establish that the three categories of expenditures had been paid
or incurred. Corporate petitioners' motion argues that
substantiation of the payments was a new matter not mentioned in
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