Comtek Expositions, Inc. v. Commissioner, Docket No. 5130-00.

• Court: U.S. Tax Court
• Writing for the Court: Beghe
• Citation: Comtek Expositions, Inc. v. Commissioner, 85 T.C.M. 1280 (T.C. 2003)
• Decision Date: 13 May 2003
• Docket Number: Docket No. 5130-00.
• Parties: Comtek Expositions, Inc. v. Commissioner.

85 T.C.M. 1280

T.C. Memo. 2003-135

Comtek Expositions, Inc. v. Commissioner.

Docket No. 5130-00.

United States Tax Court.

Filed May 13, 2003.

Frank Agostino, for the petitioner.

Gerald A. Thorpe and Edward Laubach, Jr., for the respondent.

MEMORANDUM OPINION

BEGHE, Judge.

This case is before the Court fully stipulated under Rule 122.¹ The stipulation of facts and attached exhibits are incorporated herein by this reference.

Respondent determined the following deficiencies, additions, and penalties with respect to petitioner's Federal income taxes:

Accuracy-Related
                       TYE                    Addition to Tax         Penalty
                       July 31   Deficiency   Sec. 6651(a)(1)        Sec. 6662(a)
                        1995     $3,872,347    $  960,069.25      $   774,469.40
                        1996      5,405,717     1,072,572.62        1,081,143.40
                

After giving effect to various concessions,² the issues remaining for decision are:

1. Whether petitioner and Crocus International (Crocus) were engaged in a joint venture or joint ventures to conduct trade shows in the former Soviet Union (collectively, the foreign trade shows) during the last 7 months of the fiscal year ended July 31, 1995 and during the fiscal year ended July 31, 1996. Our holding that petitioner and Crocus were not engaged in any joint venture forecloses the question of how joint venture profits should be allocated between them.

2. In the alternative, whether and in what amounts petitioner is entitled to business expense deductions for the last 7 months of the fiscal year ended July 31, 1995 and for the fiscal year ended July 31, 1996, for amounts paid or payable to Crocus as compensation for its services in operating the foreign trade shows in addition to deductions already allowed petitioner for payments in reimbursement of Crocus's direct expenses of operating such shows. We hold that petitioner is entitled to deduct as additional business expenses the amounts of exhibition fees paid to Crocus by exhibitors located in the former Soviet Union and retained by Crocus as compensation for its services in operating the foreign trade shows.

Factual Background

In October 1990, Comtek Expositions, Inc. (petitioner), was incorporated in Connecticut and commenced business. At all relevant times, petitioner has been a C corporation. At the time petitioner filed the petition in this case, its principal place of business was in Wilton, Connecticut. During the taxable periods at issue, petitioner used the accrual method of accounting.

During the taxable periods at issue, petitioner's stockholders and their respective ownership interests were as follows:

Ownership
                Stockholder                                               Percentage
                Aras Agalarov (Agalarov) ..............................     33.33
                Leonid Pollak (Pollak)   ..............................     26.67
                Michael Tseytin (Tseytin) .............................     26.67
                Boris Kogan (Kogan) ...................................     13.33
                

The stockholders are parties to a stockholders' agreement (the stockholders' agreement), which recites that petitioner has issued and outstanding 200 shares of corporate stock held by the four stockholders in amounts consistent with the stipulated ownership percentages shown above. However, the stockholders' agreement contains some internal inconsistencies and discrepancies with stipulated facts. The first two lines of the stockholders' agreement recite that it is "dated as of this ____ day of _____, 1993"; the month and date in 1993 are left blank. The last two lines of the stockholders' agreement prior to the signatures recite "IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written." Attached to the stockholders' agreement is an "Exhibit B, Certificate of Stated Value" valuing the 200 shares of the corporation at $25,000 per share—a total of $5,000,000—that is "Dated: As of December, 31, 1992". Petitioner's Forms 1120, U.S. Corporation Income Tax Return, state that Agalarov and Kogan did not become stockholders until August 1, 1993, or thereafter.³

The stockholders' agreement not only contains restrictions on the transfer of shares, rights of first refusal, and purchase options and obligations of the type usually found in agreements among stockholders of closely held corporations; it also contains provisions effectuating the stockholders' and petitioner's expressed "desire to promote their mutual interest by agreeing that the business and affairs of the corporation shall be conducted subject to the terms and conditions hereof." Among the actions that can be taken only by unanimous vote of the Board of Directors are: "(i) obligating the Corporation to participate in any exhibition or exposition; * * * [and] (v) entering into any extraordinary agreement or incurring any extraordinary expense not in the usual and regular course of business * * *".

Article 10 of the stockholders' agreement, entitled "Agreement Regarding Revenues", provides "that the `net profits' (as defined herein)⁴ to the Corporation from its exhibition and exposition operations shall be allocated to the Stockholders" under three different scenarios, depending on where "the exhibition or exposition takes place". Kogan's percentage of net profits under the three scenarios is always less than 20 percent of net profits and equal to one-half of Pollak's and Tseytin's percentages, which are always equal to each other. Under the three scenarios, Agalarov's percentages of net profits vary to include 50 percent of net profits for trade shows in the former Soviet Union, 10 percent of net profits for trade shows in Romania, and 20 percent of net profits for trade shows in the United States. The stockholders' agreement does not refer to or otherwise reconcile the inconsistency between the percentages of stock ownership, on the one hand, and the agreement for allocations of percentages of net profits from trade shows to the stockholders, on the other. The stockholders' agreement also contains no provision for payment of the net profits of the trade shows allocated to the stockholders, whether by payments as dividend distributions with respect to stock, by payments of compensation to stockholder-officiers, or in some other fashion. In any event, petitioner has never declared a dividend. In addition, Schedule E, Compensation of Officers, for each of petitioner's Forms 1120 in evidence for prior years, as well as the taxable periods at issue, shows compensation paid to the stockholder-officers as "None".

From 1990 through July 31, 1996, petitioner conducted trade shows and exhibitions primarily in the former Soviet Union⁵ with Crocus, a Russian joint-stock company solely owned by Agalarov. There is no express reference in the stockholders' agreement to Crocus or its role in putting on trade shows.

From 1990 through July 31, 1996, Crocus's business activities included organizing, marketing, and presenting trade shows and exhibitions in the former Soviet Union. During this period, Crocus also engaged in other unrelated business activities.

During 1994, 1995, and 1996, Crocus maintained offices in Moscow; Crocus did not maintain an office or transact business in the United States. During 1994, 1995, and 1996, petitioner maintained no office in Russia.

Petitioner and Crocus leased exhibition space and facilities for trade shows from Expocentr, a Russian joint-stock company. Expocentr owned or controlled the Krasnaya Presnya exhibition complex in Moscow where many trade shows were held.

From 1990 through July 31, 1996, petitioner and Crocus had no written agreement governing their business or financial relationships. At all times relevant, neither petitioner nor Crocus controlled how the other conducted its business activities. At all times relevant, petitioner and Crocus were free to compete against each other in the trade show business. However, no foreign trade shows were organized by either petitioner or Crocus unless both petitioner and Crocus agreed to put on the trade show.

Most of the exhibitors at the foreign trade shows were U.S. companies, European subsidiaries of U.S. companies, and a few Asian companies. Some Russian companies also participated in the foreign trade shows. The foreign trade shows were usually organized by product line, such as computers and computer software, food, or clothing.

Pre-January 1, 1995, Foreign Trade Shows

Before January 1, 1995, petitioner would secure commitments prior to the foreign trade shows from companies located in the United States and elsewhere to lease space from petitioner at the exhibition site to display their goods and services. Petitioner's employees attended other trade shows in the United States and Europe to solicit exhibitors for foreign trade shows; they also prepared sales brochures that were given to prospective exhibitors and advertised proposed trade shows in trade journals. Both the "Comtek" and "Crocus" names were used in the promotional materials and advertising.

Trade show exhibitors located outside the former Soviet Union paid their exhibition fees either by check payable to petitioner or by wire transfer to a bank account controlled by petitioner. Trade show exhibitors located in the former Soviet Union paid their exhibition fees to Crocus.

Trade show exhibitors located outside the former Soviet Union entered into contracts for exhibition space with petitioner. These contracts were signed by a representative of the exhibitor and a sales person employed by petitioner. The contracts provided that if the exhibitor were to cancel the contract, petitioner would retain all payments received as liquidated damages.

Generally, petitioner's employees handled all contacts with potential trade show exhibitors located outside the former Soviet Union. In some cases, a potential exhibitor from outside the former Soviet Union would instruct petitioner's employees to contact the exhibitor's business agent in Russia; in such a case,...