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which Powertex deducted as royalty expenses as royalty income on
their individual Federal income tax returns (Forms 1040NR).
Powertex created a ledger entitled "Royalties Payable to Victor
T. Podd" in order to keep track of the royalties payable on sales of
the Amoco liners. On September 27, 1990, respondent mailed an audit
letter to Powertex indicating that its 1989 Federal income tax
return was being audited. After respondent's audit had begun,
Powertex changed the ledger's title to "Royalties Payable to Victor
T. Podd, Victor I. Podd and Stephen D. Podd" and provided a copy to
respondent.
During 1990, Mr. Podd and Mr. Plante began drafting a licensing
agreement for the Amoco patents, using the Sea-Land agreement as a
model. A written license agreement was not executed, however, until
after respondent's audit had begun. During late December of 1990 or
January of 1991, the Podds, individually, and Mrs. Podd, as
secretary of Powertex, executed a document entitled "Tri-Podd
License Agreement" which was dated "as of May 23, 1988". At the
same time, the parties executed an amendment to that document dated
"as of May 24, 1989". Subsequently, a second amendment to this
agreement dated "as of May 29, 1990" was drafted and executed.
The Tri-Podd License Agreement provided for royalty payments to
the Podds of 15 percent of Powertex's net sales of Amoco liners in
exchange for the right to use the Amoco patents. The agreement's
term was 6 years, commencing June 1, 1988, and renewable by Powertex
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