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pay the routine operating expenses (e.g., office rent, supplies)
of its Humacao office. On September 5, 1991, MedChem P.R. opened
a checking account in California (California account), listing as
its address MedChem U.S.A.’s address in Woburn. Alcon P.R. sent
its invoices under the processing agreement to MedChem U.S.A.’s
Woburn address, and MedChem U.S.A.’s personnel reviewed those
invoices, authorized their payment, and paid them out of the
California account. Vendors also sent their invoices for raw
materials and components, among other things, to MedChem U.S.A.’s
Woburn address where, after September 4, 1991, MedChem U.S.A.
personnel reviewed and paid those invoices out of the California
account. Sean Moran and/or John McDonough signed the checks
payable to vendors drawn on the California account. Mr. Moran,
who reported to Mr. Donaldson, spent approximately 30 percent of
his time on Avitene financial matters.10
For its fiscal year ended on August 31, 1992, MedChem P.R.
elected under section 936(h)(5) to allocate between itself and
MedChem U.S.A. the Avitene-related costs, including the salary
expense of MedChem U.S.A. employees. MedChem P.R.’s audited
financial statements for that year reported petitioners’
calculation of 50 percent of the total Avitene product line cost
of sales and selling, general, and administrative expenses.
10 Daniel Geffken also reported to Mr. Donaldson. Mr.
Geffken spent less than 50 percent of his time on Avitene-related
matters.
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