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Guatemala. Additionally, inside the envelope with petitioner's
insignia were return envelopes and promotional brochures
advertising petitioner's business.
Oral Agreement
J.F. Leon, on behalf of petitioner, entered into an oral
agreement with J.R. Fong and R.A. Leon, on behalf of the Guatemalan
companies, whereby in exchange for petitioner's paying various
inbound expenses of the Guatemalan companies, the Guatemalan
companies would "stuff" promotional and advertising materials
(which included a return postage-paid envelope with petitioner's
post office box address in blue ink, instructions on how to send
money orders and packages to persons in Guatemala, and a list of
petitioner's locations in the United States) in all Guatemalan mail
bound for U.S. destinations. The Guatemalan companies agreed to
bear the costs of printing the envelopes and advertisements. The
printing of the advertising material and "stuffing" was primarily
performed by the Guatemalan companies in Guatemala at no cost to
petitioner; a small part of the "stuffing" was performed in the
United States by petitioner's U.S. employees.
A substantial portion of petitioner's business revenues for
tax year ended April 30, 1993, resulted from the flow of envelopes
stuffed in the Guatemalan mail bound for U.S. destinations.
Petitioner's Federal Income Tax Return
On its Federal income tax return for tax year ended April 30,
1993, petitioner deducted the amount it paid to the Guatemalan
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