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Powertex may not deduct the payments to SCS in 1990 in the amount of
$219,289 as an ordinary and necessary business expense.13
IV. Issue 3: Whether Amounts Deducted by Powertex as Management
Fees Paid to Powertex Plus International, Inc. Are Reasonable
Payments for Services Rendered
FINDINGS OF FACT
During the years 1977 through 1990, the Podds and Mrs. Podd
were Canadian citizens. From 1977 through 1983, the Podds and Mrs.
Podd did not hold any immigration status or visa with the United
States. During 1977, the Immigration and Naturalization Service
(INS) detained Mr. Podd while he was crossing the United
States/Canadian border and questioned him about his immigration
status and right to work in the United States.
On September 19, 1977, Powertex Plus International, Inc. (Plus)
was incorporated in Canada by Mr. Podd, originally under the name
Powerweb Corporation, Ltd. Petitioners' law firm advised Mr. Podd
13 As we noted, the witness who could have offered the most
illuminating testimony concerning the services provided by SCS,
Mr. Clark, was not called to testify by either respondent or
petitioners. Given the fact that Mr. Clark authorized Sea-Land
to give free freight to Powertex for the shipment of liners to
Powertex customers, the free freight arrangement was terminated
shortly after Mr. Clark retired from Sea-Land, and thereafter
Sea-Land filed suit to recover the payments from Powertex to SCS,
the most plausible explanation for the payments is that they were
kickbacks to Mr. Clark. Petitioners have obvious reasons for not
contending that the payments were kickbacks, and respondent, as
noted, may have been reluctant to characterize the payments as
illegal kickbacks due to the burden of proof provision in sec.
162(c)(2). In any event, we are left with a less than adequate
record concerning the SCS payments, and it is petitioners' burden
to prove that such payments were ordinary and necessary business
expenses.
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