Podd v. Commissioner
| Decision Date | 30 June 1998 |
| Docket Number | Docket No. 6210-94.,Docket No. 20226-93.,Docket No. 6211-94.,Docket No. 20227-93.,Docket No. 6214-94.,Docket No. 20225-93.,Docket No. 6209-94.,Docket No. 6213-94.,Docket No. 6212-94.,Docket No. 20228-93.,Docket No. 20229-93. |
| Citation | 75 T.C.M. 2575 |
| Parties | Stephen D. Podd, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Respondent determined deficiencies, additions to tax, and penalties in petitioners' Federal income taxes as follows:
Stephen D. Podd, Docket Nos. 20225-93, 6212-94:
Penalties
Year Deficiency Sec. 6662(a)
1988 ............................ $ 463 --
1989 ............................ 12,654 $ 2,530.80
1990 ............................ 61,674 12,335.00
Victor I. Podd, Docket Nos. 20226-93, 6211-94:
Penalties
Year Deficiency Sec. 6662(a)
1988 ............................ $ 951 --
1989 ............................ 12,065 $ 2,413
1990 ............................ 135,094 27,019
Victor T. Podd, Docket Nos. 20227-93, 6210-94:
Additions to Tax
--------------------------- Penalties
Year Deficiency Sec. 6653(a)(1) Sec. 6661 Sec. 6662(a)
1988 ............................ $ 48,402 $ 2,402 $12,101 --
1989 ............................ 475,634 -- -- $95,127
1990 ............................ 68,637 -- -- 13,727
Julia Podd, Docket No. 6213-94:
Penalties
Year Deficiency Sec. 6662(a)
1990 ............................ $ 52,277 $ 10,455
Powertex, Inc. Docket Nos. 20228-93, 6214-94:
Additions to Tax Under Section
------------------------------------------------ Penalties
Tax Year Ended Deficiency 6653(a)(1)(A) 6653(a)(1)(B) 6653(a) 6661 6662(a)
5/31/88 ............ $ 89,534 $6,570 1 -- $32,850 --
5/31/89 ............ 311,413 -- -- $17,869 89,345 --
5/31/90 ............ 514,390 -- -- -- -- $102,878
1 50 percent of the interest due on the $148,814
Respondent determined deficiencies in, and additions to and penalties in, Powertex, Inc.'s withholding tax as follows:
Powertex, Inc., docket Nos. 20229-93, 6209-94:
Additions to Tax Under Section
Tax Year ---------------------------------------------------------------------------------- Penalties
Ended Deficiency 6651 6653(a) 6653(a)(1)(A) 6653(a)(1)(B) 6656 6661 Sec. 6662(a)
5/31/85 ..... -- -- -- -- -- 167 -- --
5/31/86 ..... $412,425 $103,776.50 -- $ 20,621.25 1 41,510.60 $103,106.25 --
5/31/87 ..... -- -- -- -- -- 136 -- --
5/31/88 ..... 48,206 12,454 $2,410.30 -- -- 4,981.60 12,051.50 --
5/31/89 ..... 487,975 -- -- -- -- 50,106.90 -- $100,213.80
5/31/90 ..... 245,882 -- -- -- -- 24,588 -- 49,176
1 50 percent of the interest on the deficiency
Pursuant to amended answers, respondent asserts increased deficiencies, additions to tax, and penalties in petitioners' Federal income taxes.2
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions,3 the issues remaining for decision are:
1. Whether petitioner Powertex, Inc., is entitled to deduct certain royalty payments paid to certain individual petitioners, or whether an adjustment under section 162 or section 482 is warranted;
2. whether consulting fees paid by Powertex, Inc., to Special Commodities Services, Inc., are ordinary and necessary business expenses deductible under section 162;
3. whether amounts deducted by Powertex, Inc., as management fees paid to Powertex Plus International, Inc., are reasonable payments for services rendered;
4. whether the individual petitioners received constructive dividends;
5. whether petitioner Victor I. Podd was a resident of the United States during 1990; and
6. whether petitioners are liable for certain additions to tax and penalties as determined by respondent.
For convenience and clarity, we have divided our opinion into separate segments. The first segment sets forth general findings of fact applicable to all of the issues in the instant case. Each of the segments following our general findings of fact discusses one of the separate issues set forth above and sets forth our findings of fact and opinion concerning the respective issue.
Some of the facts have been stipulated for trial pursuant to Rule 91. The stipulations of facts are incorporated herein by reference, and they are found accordingly.
At the time its petition was filed, in the instant case, Powertex, Inc. (Powertex) was a New York corporation. Powertex's principal corporate office was located at Rouses Point, New York. At the time they filed their petitions in the instant case, petitioners Victor T. and Julia Podd resided in Mount Royal, Quebec, Canada; petitioner Stephen D. Podd resided in North Hero, Vermont; and petitioner Victor I. Podd resided in Boca Raton, Florida.
Powertex was incorporated under the laws of the state of Vermont in 1977 by petitioner Victor T. Podd (Mr. Podd), his wife petitioner Julia Podd (Mrs. Podd), and his brother Alexander Podd. The original name of the corporation was Powerstrap, Inc., which was subsequently changed to Powertex Corporation, Inc., in 1979 and finally to Powertex, Inc., in 1984. Powertex was initially formed to be a packaging manufacturer. Powertex began its business operations in Alburg, Vermont, on property owned by Mr. Podd. In 1984, Powertex expanded its business from the Alburg facility to a new manufacturing plant in Rouses Point, New York.
From 1977 through 1992, Mr. Podd was the president, chief executive officer and largest shareholder of Powertex, and Mrs. Podd was its corporate secretary and treasurer. From 1983 through 1990, their children, Victor I. Podd (Victor, Jr.), and Stephen D. Podd (Stephen), served as vice presidents of Powertex. From 1977 through 1990, all of the outstanding stock in Powertex was owned by Mr. Podd, Victor, Jr., Stephen, and Mrs. Podd. From 1977 through 1990, Mr. Podd and his two sons (collectively, the Podds) and Mrs. Podd were Canadian citizens.
Today, Powertex is a manufacturer of several products used in the shipping industry. The core products sold by Powertex are intermodal container liner systems, used to transport such dry bulk flowable products as rice, corn, sugar, carbon black, and PVC resins. Intermodal cargo containers come in either 20-, 35-, or 40-foot lengths, and can carry up to 24 tons of cargo. An intermodal container liner is a plastic liner placed inside a shipping container for the purpose of protecting the contents from loss and contamination during shipment and to prevent corrosion of the container itself. Essentially, the liner is a large plastic bag which conforms to the interior dimensions of the intermodal container. The liner is attached to a bulkhead which acts as a sidewall and holds the cargo in the container, and which contains a portal through which the cargo is loaded and unloaded. After installation and inflation of the liner system inside the container, cargo can then be conveyed into the container. The container is then transported by rail, truck, or ship.
Powertex currently manufacturers three principal types of intermodal container liner systems.
One of Powertex's earliest products consisted of an intermodal container liner system known as the hideliner. During the 1970's, Mr. Podd became acquainted with several employees of Sea-Land Service, Inc., (Sea-Land), a company engaged in the commercial transportation business. Sea-Land shipped raw green animal hides packed in salt. The hides released contaminating fluids which, combined with the salt, had a caustic effect on the containers in which they were shipped. In response to this problem, Mr. Podd developed the hideliner (also known as the powerliner) to be used for shipping raw green animal hides.
Essentially, the hideliner consists of a base sheet of foam material and a top cover sheet of polymeric material which is bonded to the base sheet, and which extends over at least a portion of the walls of the container. As designed, it constitutes a liquid impervious liner useful in the transportation of raw animal skins.
Mr. Podd filed a patent application for the hideliner with the U.S. Patent and Trademark Office on August 1, 1978. On February 5, 1980, the U.S. Patent and Trademark Office issued United States Patent No. 4,186,845 (the '845 patent) covering the hideliner invention.
On May 21, 1980, Mr. Podd licensed to Powertex the exclusive right to manufacture, market, and sell the hideliner. The terms of the agreement granted Powertex an exclusive 6-year license in exchange for royalties of 5 percent during the initial six-year term of the license and 7½ percent during any extensions of the license. The license agreement was renewed on November 30,...
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