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dollars ($400,000) when the contract was executed. The balance
of the stated consideration was reflected in a Cr$2,514,400,000
promissory note from Spencer Medical to Coral (the Coral note),
the equivalent (in 1983) of US$2.8 million.
The Coral note was payable in Brazilian cruzeiros in four
equal payments on December 1 of each of the years 1990, 1991,
1992, and 1993. Each payment was to consist of one-fourth of the
original Coral note principal (Cr$628,600,000) and all accrued
interest as of the date of the payment. At the time the Coral
note was executed, the principal payment due on December 1, 1990,
was the equivalent of US$700,000.
Spencer Medical's Federal income tax return for the calendar
year ended December 31, 1983, was timely filed with the Internal
Revenue Service Center in Philadelphia, Pennsylvania. On its
1983 return, Spencer Medical claimed a research expense deduction
in the amount of $3.2 million. The return did not disclose that
the research expense arose out of a promissory note or out of a
transaction with Coral. Spencer Medical's 1983 return was not
examined by the Internal Revenue Service (IRS) prior to April 15,
1987.
Spencer Medical's Federal income tax return for the calendar
year ended December 31, 1990, was filed with the Internal Revenue
Service Center in Philadelphia, Pennsylvania, on October 21,
1991.
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