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During 1995 and 1996, CPSG, Inc., by and through its wholly
owned subsidiaries, paid $67,543 and $1,361,006 of research and
development costs on behalf of petitioner. These costs included:
Description 1995 1996
Salaries1 $28,584 $1,076,850
Contract labor 20,947 46,451
Building rent 5,644 54,293
Commissions 4,250 3,306
Telephone 428 33,001
Entertainment 106 659
Equipment rental 6,052 68,379
Repairs/maintenance 1,036 26,086
Freight 497 265
Janitorial -0- 426
Recruiting fees -0- 4,187
Travel -0- 3,016
Services -0- 13,495
Dues & subscriptions-0- 1,500
Electricity -0- 14,218
License fees -0- 12,050
Small equipment -0- 573
Office supplies -0- 1,761
Postage/misc. -0- 491
1The category “Salaries” represents the cumulative amount paid to
individuals living in Australia.
CPSG, Inc. used its accounting system to track these costs.
CPSG, Inc. initially deducted these research and development
costs on its Federal income tax return for the year ended
September 30, 1996. CPSG, Inc. subsequently amended its 1996
return eliminating the deduction.
Petitioners attached Schedules C for a computer software
development business named “DMS Development Co.” to their 1995
and 1996 returns. For the years at issue, petitioners reported
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