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had difficulty developing customers to support the continued
lease of the MLOCR. In the latter part of 1990, petitioner
entered into discussions with a majority shareholder of Postal
Automation, one of ZSI’s competitors, regarding the divestiture
of their respective presorting divisions. Both parties were
anxious to sell their respective presorting divisions.
Petitioner eventually agreed to purchase Postal Automation’s
presorting division for approximately $200,000 to $250,000 and a
share of ZSI’s profits for the following 2 years. Petitioner’s
bank financed the purchase and additional operating costs for ZSI
in exchange for security interests in petitioner’s home or farm
and in a printing company petitioner owned.
In 1991, ZSI first qualified to participate in the VAR
program. ZSI continued to receive the 4 cents presorting
discount and began receiving the 0.9 cent value-added refund (VAR
income or VARI). During 1991, ZSI continued to split the
presorting discount with its customers but was able to retain all
of the VARI it received, and the presorting division had its
first profitable year. By 1992, however, some of ZSI’s customers
had learned of the VAR program, and they demanded a share of the
VARI ZSI received. ZSI complied, for fear of losing those
customers,2 and shared the VARI either by directly paying a
2As of the valuation date, ZSI had at least five primary
competitors of relatively equivalent size, and there were few
(continued...)
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