Eric B. Benson, et al. - Page 21

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          life insurance payments made by ERG; (4) constructive dividends             
          of $6,000 from director’s fees; (5) Franklin dividends of $193;             
          and (6) royalty income of $709.                                             
               The parties dispute whether the payments of $483,098 from              
          ERG to NPI (Hercules payment) constitute omitted gross income.              
          On their original 1989 return, the Bensons reported royalty                 
          income of $165,48111 received from NPI.  Benson v. Commissioner,            
          T.C. Memo. 2004-272.  In our prior opinion, we stated:                      
                    On or about November 22, 1989, Hercules and ERG                   
               entered into a memorandum of agreement (MOA), whereby                  
               Hercules agreed to pay $483,098 as an add-on cost to                   
               increase production of the baffle sets delivered by                    
               ERG.  The MOA was unique because it called for Hercules                
               to “facilitize” or fund ERG’s plant and equipment,                     
               the cost of which is normally paid for by the owner of                 
               the plant and equipment.  Attached to the MOA is                       
               “schedule 1”, which lists the equipment and their                      
               associated prices as contemplated by the MOA.  [Id.;                   
               fn. ref. omitted.]                                                     
          We also stated that “Burton testified that the ‘engineering                 
          services’ for which ERG compensated NPI were consulting design              
          services that he performed to make the Hercules contract ‘work’.”           
               However, the Bensons’ return does not refer to the Hercules            
          payment.  The Bensons assert that the Hercules payment is                   
          disclosed on the 1989 amended return of NPI.  As we held supra,             
          the 1989 amended return of NPI is not to be considered as a                 

               11 It appears that respondent has factored this disclosure             
          into his calculation as the “Reverse Royalty income                         
          recharacterized as constructive dividends”.                                 

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