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reimbursement to petitioner and Crocus of their direct
expenses and overhead allocable to foreign trade shows]
were * * * divided either equally between petitioner
and Crocus (petitioner’s position) or between Aras
Agalarov (50%) and the other three shareholders of
Comtek (50%) (respondent’s position).
* * * * * * *
27. The parties stipulate that both ECI and the
royalty agreement should be disregarded for federal
income tax purposes. Respondent concedes that if the
foreign trade show receipts are treated as gross income
received by petitioner, then petitioner is entitled to
deduct the foreign trade show expenses that were paid
from the trade show receipts treated as gross income to
the extent that such expenses have been substantiated
* * *. This would include trade show expenses paid by
ECI directly and trade show expenses Crocus paid for
which it was reimbursed through ECI. The parties agree
that no adverse inference should be drawn against
either of them based on the ECI [royalty] agreement.
The parties agree that the Court may characterize the
relationship between petitioner and Crocus vis-a-vis
the foreign trade shows based solely on this
Stipulation of Facts and the Exhibits attached hereto
and the opposing party’s admissions filed in this case.
The parties reserve the right to object on relevancy
grounds to any proposed finding of fact based on the
admissions.
The sole issue in dispute is how Crocus and
petitioner should report the income generated by the
foreign trade shows. Petitioner contends that, if the
ECI [royalty] agreement is ignored, then it and Crocus
were joint venturers in the foreign trade shows during
the years at issue and that the trade show profit
should be divided either equally (i.e., 50% petitioner,
50% Crocus) or that profits should be allocated based
on each party’s payment of trade show expenses. If the
Court finds that petitioner and Crocus were engaged in
a joint venture during the years at issue and that they
agreed to split equally the net profits from the
foreign trade show business, respondent concedes that
such an allocation of the net profits would have
"substantial economic effect" under I.R.C. � 704(b)(2).
Alternatively, if the Court determines that petitioner
must report all of the gross receipts, then petitioner
contends that it is entitled to a deduction for the 50%
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