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respondent determined that petitioner was not entitled to a
royalty expense deduction for the portion of the royalty fees
paid to Mr. Paul (the Contested Payments).5 At the time,
respondent's theory for disallowing the deduction was not clear.
Respondent issued a notice of deficiency for the taxable years
1992 through 1994 on February 25, 1997.
Petitioner filed its petition in this case on May 16, 1997.
Subsequently, on December 9, 1997, the Court served notice that
this case would be called for trial in San Diego, California, on
May 11, 1998. Shortly before that date, on May 4, 1998, Kevin M.
Bagley entered his appearance as petitioner's co-counsel. Two
days later, on May 6, 1998, the parties placed a telephone
conference call to Domino's counsel. During this call, Mr.
Bagley asked Domino's counsel regarding the consequences if
petitioner failed to make the Contested Payments to Mr. Paul.
Domino's counsel advised the parties that Domino's would be
entitled to sue petitioner to recover the unpaid royalty.
Pursuant to this conversation, respondent conceded the
deductibility of the Contested Payments on May 7, 1998, by
executing a stipulated decision, which was entered by the Court
on May 14, 1998. Thereafter, on August 10, 1998, petitioner
5 Respondent made certain other adjustments that are only
computational that result from the disallowance of the royalty
expense deduction for the Contested Payments.
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