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amount of the funds petitioners advanced to HPD as worthless loans.
The Audit
In response to Internal Revenue Service inquiries regarding the
$300,000 profit participation fee, petitioners’ accountant explained
in an August 10, 1992, letter, that the fee represented a charge for
services HPD rendered to HPD-Latigo (beginning from HPD-Latigo’s
inception). With this letter, two undated interoffice memoranda
discussing the $300,000 fee were enclosed.3
Notice of Deficiency
In the notice of deficiency, respondent increased petitioners’
1989 distributive share of profit arising from HPD-Latigo (based
upon the disallowance of HPD-Latigo’s $300,000 profit participation
3 Mr. Hamdan wrote a memorandum on HPD’s behalf, advising
Peter Klaiber, HPD’s executive vice president, that HPD should
charge HPD-Latigo an $100,000 yearly fee for services rendered.
In a second memorandum, Mr. Klaiber advised Mr. Hamdan that an
$100,000 yearly fee would be “reasonable”, and would cover
compensation for services HPD rendered regarding HPD-Latigo’s
formation. Mr. Klaiber listed the services to be rendered, among
others, as follows:
01. A compensation towards the formation of the
corporation:
Legal, Accounting and Tax Consultation;
Federal and State Registration; Incorporation
Certification; Notarization; Publication and
other similar matters.
02. A compensation towards the running of the
corporation:
Outside Legal, Accounting and Tax
Service; Internal Maintenance of Accounting
and Tax Records; General and Administrative
Service; and other similar matters.
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Last modified: May 25, 2011