- 46 -
17. Unbeknownst to Sea-Land, in or about the time the
Patent Licensing Agreement was negotiated and entered into
between Powertex and Sea-Land, James Clark and Podd negotiated
an additional compensation arrangement. In exchange for James
Clark's insuring the "success" of the Patent Licensing
Agreement, Podd agreed to pay James Clark a bribe or kickback
equal to 2 �% of the sales of Sea-Bulk liners by Powertex.
Upon information and belief, the kickbacks to James Clark were
increased to 3 �% of sales in or about mid 1987.
18. In an effort to conceal the kickbacks paid to James
Clark, Podd and Clark entered into a "consulting agreement"
between Special Commodities Services, Inc. ("SCS") and
Powertex. The consulting agreement was dated November 18, 1983
and executed by James Clark as the President of SCS, Mary Clark
as the Vice President, Secretary and Treasurer of SCS, and
Victor Podd as President of Powertex.
19. Upon information and belief, SCS was a shell
corporation established by James Clark for the sole purpose of
concealing the kickbacks paid by Victor Podd and Powertex to
James Clark. Upon information and belief, James Clark provided
no consulting services, or services of any kind, to Powertex or
Victor Podd. All of James Clark's activities regarding
Powertex were in his role as an employee of Sea-Land.
The lawsuit was settled in or around December 1996, with respect to
Mr. Clark, Mary Clark, and SCS, and during or around January 1997,
with respect to Powertex and Mr. Podd. The terms of the settlements
were not submitted in evidence.
OPINION
In the notice of deficiency, respondent disallowed the $219,289
deduction claimed by Powertex for "consulting fees" paid to SCS for
the fiscal year ending May 31, 1990. Respondent determined that the
fees were neither ordinary and necessary business expenses nor
expended for the designated purpose. Respondent did not assert that
the deduction for payments to SCS should be disallowed under section
162(c) as an illegal bribe or kickback. We suspect that
respondent's hesitancy to pursue a section 162(c)(2) argument is due
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