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companies pursuant to the Distribution Agreement. This amount
totaled 45 percent of petitioner's gross mail courier revenues for
the year or $5,163,888. In addition, petitioner deducted other
expenses totaling in excess of $6 million and compensation to
officers in the amount of $1.87 million.
Notice of Deficiency
In the notice of deficiency, of the total deductions claimed
on petitioner's 1993 fiscal year income tax return (apparently
including the amount paid pursuant to the Distribution Agreement),
respondent disallowed $2,952,091 on the basis that the disallowed
deductions were not for petitioner's "own ordinary and necessary
business expenses" but rather were for expenses of the Guatemalan
companies controlled by petitioner's sole shareholder's brothers.
Respondent calculated this $2,952,091 using an indirect method
beginning with the cost of postage on items mailed to U.S.
destinations. Respondent then allocated a portion of petitioner's
indirect expenses to what respondent characterizes as the cost of
processing and delivering mail from Guatemala to the United States.
Due to a mathematical adjustment, respondent subsequently reduced
the disallowed amount to $2,274,751 and made a corresponding
reduction in the proposed penalty.
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