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Petitioner argues that we should estimate a markup paid or
payable to Crocus as compensation for its services equivalent to
50 percent of the net profits for foreign trade shows held during
the taxable periods at issue. Specifically, petitioner asks us
to allocate Crocus a markup of $2,135,614.50 (50 percent of
$4,271,229 net profit) for foreign trade shows conducted during
the last 7 months of the fiscal year ended July 31, 1995, and
$3,058,173 (50 percent of $6,116,346 net profit) for foreign
trade shows conducted during the fiscal year ended July 31, 1996.
Respondent asks us to disregard the corporate entities of
petitioner and Crocus. Respondent views their transactions at
the stockholder level, in accordance with Article 10 of the
stockholders’ agreement, under which petitioner’s net profits of
foreign trade shows are to be allocated 50 percent to Agalarov,
and the other 50 percent split between Pollak, Tseytin, and
Kogan. Respondent argues that petitioner should not be allowed a
markup to Crocus because Crocus was the alter ego of Agalarov who
should receive his share of 50 percent of the net profits under
the stockholders’ agreement. Specifically, respondent asks us to
allocate all gross receipts and expenses to petitioner, which
would leave it with net profit of $4,271,229 for the last 7
months of the fiscal year ended July 31, 1995, and net profit of
$6,116,346 for the fiscal year ended July 31, 1996. In
respondent’s view, Agalarov would then be allocated 50 percent of
the net profits to be paid to him as a dividend, with the
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