- 48 -
As found above, in 1989 ERG transferred $483,098 to NPI with
respect to the MOA. Although there was conflicting testimony
concerning what was contemplated by the MOA,44 petitioners
offered no evidence of what specific services, if any, were
performed and/or what equipment, if any, was purchased. Mr.
Bradac, Burton’s accountant and return preparer, testified that
Burton informed him that no equipment was purchased, and he
instead booked the payment as a security deposit.
Generally, money was transferred from ERG to NPI ostensibly
for two reasons. First, in accordance with the exclusive license
agreement between ERG and NPI, 10 percent of ERG’s profits flowed
to NPI in the form of royalties.45 Second, to achieve Burton’s
goal of having ERG show a paper profit of approximately $75,000
per year, the difference between the purported royalty payments
and ERG’s actual annual profit (less approximately $75,000) was
transferred as payment to NPI for purported engineering services
performed by NPI.
44Warren Timothy, a former employee of Hercules, testified
that the MOA was a purchase contract, and it did not contemplate
reengineering. Similarly, William Morton, also a former employee
of Hercules, testified that the MOA was an equipment purchase
contract. However, Bryan Leyda, an ERG employee, testified that
the schedule attached to the MOA was his “personal best estimate”
for time and engineering to design the assembly, the
modifications, and the installation, and any debugging processes.
45The payments were labeled “royalties” on the basis of
information that Burton provided. Bradac did not see a copy of
the royalty agreement until after he prepared the returns.
Page: Previous 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 NextLast modified: May 25, 2011