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then current structure of GCI/SDCI and MCI, i.e., separate
corporations for each castle--the format adopted for the Florida
and Buena Park castles. The letter stated that they were
separate entities that had, and were currently incurring, startup
costs. The C&L letter recommended that MDT recharacterize
previous advances made to the separate entities as "divisional
expenditures" and operate the two entities as divisions, noting
that "Andres Gelabert indicated that the minority shareholders
would have no objection to this idea." The reason for making
these recommendations was solely to achieve tax benefits. The
anticipated benefits were that MDT could deduct MCI's and
GCI/SDCI's startup expenses and lump-sum franchise payments.
Both MCI and GCI/SDCI continued to operate in their own
names after C&L suggested the divisional changes. GCI/SDCI had
board of directors meetings into October 1989. MCI continued to
do business and enter into contracts in its own name until the
New Jersey castle opened. Based on petitioners' documentation
and their conduct, we are persuaded that MCI and GCI/SDCI were
separate entities that incurred their own startup costs.
Accordingly, respondent's determination as to this issue will be
sustained.
VII. Additions to Tax and Penalties for Fraud and Negligence
A. Fraud
Respondent determined that some of petitioners are subject
to additions to tax and penalties for fraud and, in the
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