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basis to provide consulting services to CPG to identify why CPG
was losing money and how to stop such losses.4
After conducting onsite inspections and reviewing pertinent
information, petitioner reported to CPG’s chief executive officer
regarding his ideas on how to stop the “profit bleed”. In
response, CPG attempted to hire petitioner to implement his
ideas. Instead of becoming an employee of CPG, the parties
agreed to move the marketing of CPG’s software out from under CPG
and agreed that petitioner would organize his own corporation to
market CPG’s software products for a stated royalty.
Consequently, petitioner organized CPSG, Inc.
CPSG, Inc. is a computer software corporation that was
organized in November 1992, pursuant to the laws of the State of
California. During the taxable years at issue, petitioner owned
all the outstanding shares of CPSG, Inc., and was its president,
chief operating officer, and sole director.
Beginning in 1992, CPG was a party to contracts with three
Australian syndicates that were engaged in software development
(the syndicates). The syndicates were Australian tax-advantaged
research and development partnerships. The syndicates provided
financing to CPG for the development of new software technology.
The syndicates raised approximately $20 million for CPG’s
4Petitioner was known in the computer industry as a
turnaround specialist.
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