MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, JUDGE: Respondent made the following determinations, which petitioner contests:

RE: FEDERAL INCOME TAX DEFICIENCIES:

          Year       Deficiency

          ____       __________

          1992       $ 74,225

          1993        94,903

RE: DEFICIENCIES FOR WITHHOLDING OF INCOME TAX AT SOURCE AND

ADDITIONS TO TAX:

                    Additions to Tax

         Withholding    ____________________________

Year        Deficiency     Sec. 6651(a)(1)   Sec. 6656

____        ___________    _______________   _________

1992        $ 53,608       $ 13,402      $ 5,361

1993        107,107        26,777      10,711

All section references are to2000 Tax Ct. Memo LEXIS 425">*426 the Internal Revenue Code (the Code) in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Following a concession by each party, we must decide whether petitioner, a U.S. corporation that owned and operated a cattle-crossing facility on the United States (U.S.) side of the U.S.-Mexican border, is entitled to deduct amounts paid to its Mexican parent company in 1992 and 1993 with respect to costs incurred by the parent company for inspection and bathing of cattle crossing the border. If we conclude that the amounts are not deductible, then we must decide (1) whether petitioner's payments to its parent company constitute dividend payments, for which petitioner was required to withhold 30 percent pursuant to section 1442; (2) whether petitioner was required to file Federal withholding tax returns, Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, for 1992 and 1993; and (3) whether petitioner is liable for additions to tax pursuant to sections 6651(a)(1) and 6656 (with regard to the withholding of income tax at source).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 2000 Tax Ct. Memo LEXIS 425">*427 The stipulations of facts and the attached exhibits are incorporated herein by this reference.

BACKGROUND

Union Ganadera Regional de Chihuahua (Union Mexico) was a Mexican, nonprofit agricultural cooperative, established in 1936. It was organized to assist its members (namely, 43 individual cattle associations, totaling approximately 3,000 Mexican cattle ranchers) in the crossing of cattle from Mexico into the United States and vice versa. Union Mexico was the parent company of Union Ganadera Regional de Chihuahua, Inc. (petitioner), a New Mexico corporation organized in 1991. At all relevant times, petitioner maintained its principal place of business in Santa Teresa, New Mexico.

Petitioner assisted Union Mexico in the crossing of cattle over the U.S.-Mexican border. It employed eight individuals in conducting its cattle-crossing activities on the U.S. side of the border; whereas, Union Mexico employed 45 individuals in conducting its cattle-crossing activities on the Mexican side of the border.

THE CATTLE EXPORT/IMPORT BUSINESS

Prior to the establishment of petitioner's facilities, Union Mexico owned three cattle-crossing facilities in the State of Chihuahua, Mexico: Ciudad2000 Tax Ct. Memo LEXIS 425">*428 Juarez, Ojinaga, and Palomas. ¹ At each of these facilities, cattle were inspected and bathed to rid the cattle of parasites (bathing) before crossing into the United States.

Before petitioner was incorporated, Union Mexico did not own any cattle-crossing facilities in the United States. Rather, cattle crossed into the United States from Mexico by way of unrelated, privately owned U.S. stockyards. ²

2000 Tax Ct. Memo LEXIS 425">*429 Union Mexico organized petitioner to own and operate a cattle-crossing facility (the Santa Teresa facility) on the U.S. side of the U.S.-Mexican border directly across the border from its San Jeronimo facility. The Santa Teresa facility was located in Santa Teresa, New Mexico, just outside the city limits of El Paso, Texas. It began its cattle-crossing operations in 1992.

The combined cattle-crossing facilities at San Jeronimo and Santa Teresa were integrated facilities, consisting of 92 acres that straddle the U.S.-Mexican border. Petitioner owned 39 percent of the total acreage (at Santa Teresa), and Union Mexico owned 61 percent (at San Jeronimo). To cross the U.S.-Mexican border, cattle walked approximately 120 feet from the San Jeronimo facility (in Mexico) to the Santa Teresa facility (in the United States).

The Santa Teresa facility, together with the San Jeronimo facility: (1) Provided efficiencies of scale for crossing cattle over the U.S.-Mexican border by providing an integrated cattle-crossing location; (2) improved the quality of the U.S. facilities that receive Mexican cattle; (3) reduced theft, stress, and weight loss of the cattle; and (4) reduced Union Mexico's2000 Tax Ct. Memo LEXIS 425">*430 losses in exporting cattle.

The San Jeronimo facility included a building with bathing facilities, cattle pens, weighing facilities, and offices. It housed Union Mexico's cattle-crossing operations and provided office space for U.S. Department of Agriculture (USDA) inspectors and their Mexican counterparts. At this location, Union Mexico coordinated (1) the receipt of cattle from the trucks, (2) the holding and feeding of cattle, (3) the weighing of cattle, (4) the inspection of cattle, (5) the bathing of cattle, and (6) the corralling of cattle acceptable for export to the United States. The Santa Teresa facility included a building, sorting and weighing facilities, and cattle pens.

Petitioner accepted the USDA-approved cattle from the San Jeronimo facility and sorted and temporarily housed the cattle until a U.S. purchaser arrived. ³ (Usually this occurred within 24 hours or less.) Union Mexico provided all of petitioner's electricity and water.

2000 Tax Ct. Memo LEXIS 425">*431 The cattle generally spent 15 to 20 hours at the San Jeronimo facility and 8 hours at the Santa Teresa facility. Before the cattle left petitioner's facility, a customs broker (an independent contractor unrelated to petitioner or Union Mexico) collected fees from the Mexican rancher/seller, including a $ 3 fee for each head of cattle that crossed through the facility. Thereafter, the customs broker remitted the $ 3 per head of cattle fee to petitioner. (This fee also included the cost of necessary paperwork and feed for 1 day.) If the cattle remained overnight, petitioner charged an additional $ 6 fee for each bale of hay consumed.

Petitioner agreed to pay Union Mexico $ 1.50 of the $ 3 per head of cattle fee as petitioner's share of the water, electrical, inspection, and bathing expenses. This $ 1.50 per head of cattle fee was determined by estimating the costs Union Mexico incurred in connection with crossing the cattle into the Santa Teresa facility from the San Jeronimo facility and allocating one-half of these costs to petitioner. The financial arrangement between petitioner and Union Mexico was set forth in a January 2, 1993, contract ⁴.

2000 Tax Ct. Memo LEXIS 425">*432 PETITIONER'S FEDERAL INCOME TAX RETURNS AND THE NOTICES OF DEFICIENCY

On its 1992 Form 1120X, Amended U.S. Corporation Income Tax Return, petitioner claimed a $ 204,288 deduction for amounts it paid to Union Mexico. Respondent disallowed that portion of the claimed deduction (totaling $ 181,137) that related to payment for inspection and bathing costs but allowed that portion relating to Union Mexico's furnishing of water and electricity to petitioner. Subsequently, respondent reduced the disallowed amount to $ 178,694 to reflect an additional allowance of $ 2,443 for water and electricity costs. ⁵

2000 Tax Ct. Memo LEXIS 425">*433 On its 1993 Form 1120, U.S. Corporation Income Tax Return, petitioner claimed a $ 397,519 deduction for amounts it paid to Union Mexico. Respondent again disallowed that portion (totaling $ 357,024) that related to payment for inspection and bathing costs.

Respondent disallowed the payment for inspection and bathing costs on the basis that the costs for these expenses were not properly allocable to petitioner, but rather were those of Union Mexico. As a consequence of this determination, respondent characterized petitioner's payments to Union Mexico as constructive dividends (representing a distribution of petitioner's earnings and profits to its foreign parent company).

Respondent further determined that petitioner should have withheld income tax at the source, pursuant to section 1442, with respect to purported dividends ($ 178,694 for 1992 and $ 357,024 for 1993). Thus, respondent determined withholding deficiencies of $ 53,608 for 1992 and $ 107,107 for 1993. Lastly, respondent determined that petitioner was liable for sections 6651(a)(1) and 6656 additions to tax.

ULTIMATE FINDINGS OF FACT

The amount petitioner paid Union Mexico with respect to the costs for inspection and2000 Tax Ct. Memo LEXIS 425">*434 bathing of cattle was an ordinary and necessary section 162 expense.

OPINION

Our task is to decide whether petitioner is entitled to deduct the payments it made to Union Mexico for costs of inspection and bathing of cattle crossing into the United States (at petitioner's Santa Teresa facility) from Mexico. Petitioner maintains that these payments were ordinary and necessary business expenses. Respondent disagrees, and further argues that the disallowed fees represented disguised dividends paid by petitioner to its sole shareholder. Respondent further maintains that inasmuch as the inspection and bathing processes occurred at Union Mexico's San Jeronimo facility prior to the cattle crossing into the United States, the fees for these expenses (insofar as petitioner is concerned) are neither customary nor appropriate.

The applicable Code provision is section 162(a), which provides that "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". The test for determining whether an expense is ordinary and necessary is whether a "hard-headed" businessperson, under the circumstances, would2000 Tax Ct. Memo LEXIS 425">*435 have incurred the expense. See, e.g., Cole v. Commissioner, 481 F.2d 872">481 F.2d 872, 481 F.2d 872">876 (2d Cir. 1973), affg. T.C. Memo 1972-177. Because of the relationship between petitioner and Union Mexico, ⁶ the expenses at issue are subject to close scrutiny. See Higgins v. Smith, 308 U.S. 473">308 U.S. 473, 84 L. Ed. 406">84 L. Ed. 406, 60 S. Ct. 355">60 S. Ct. 355 (1940).

In the case at bar, the record reflects that petitioner reimbursed Union Mexico for its share of the inspection and bathing expenses, and not for any nefarious reason. Petitioner's and Union Mexico's businesses were directly linked. The inspection and bathing expenses were shared business-related expenses, and petitioner and Union Mexico benefited equally from the inspection and bathing functions carried out by Union Mexico. The benefits derived from the inspection and bathing of cattle ensured the continued viability of petitioner's cattle-crossing business. Thus, we are satisfied that the entire amount petitioner paid to Union Mexico constituted2000 Tax Ct. Memo LEXIS 425">*436 an ordinary and necessary business expense. The inspection and bathing of cattle on the Mexican side of the border was required before petitioner could import the cattle into the United States. Petitioner's revenues were based on the flow of USDA-approved cattle originating in Mexico to U.S. buyers.

We reject respondent's argument that the costs Union Mexico incurred for inspection and bathing of the cattle are strictly Union Mexico expenses (which should not be passed on to petitioner). The cattle-crossing operation was an integrated operation. Petitioner paid Union Mexico the disputed fees for its share of the expenses incurred to perform necessary activities in the ordinary course of its business.

To conclude, the expenses at issue were critical and indispensable to petitioner's business and therefore were ordinary and necessary business expenses. Accordingly, we hold that the expenses relating to the costs of inspection and bathing of cattle in Mexico were properly deductible as ordinary and necessary business expenses and did not constitute constructive dividends. Because of this holding, the remaining issues go by the wayside.

In reaching our holding, we have considered all2000 Tax Ct. Memo LEXIS 425">*437 of the arguments presented and, to the extent not discussed above, find them to be irrelevant or without merit.

To reflect the foregoing and the parties' concessions,

Decision will be entered under Rule 155.