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The document purports to sell certain “patent rights”
owned by ERG to NPI and simultaneously grants ERG an
exclusive license to use the patent rights transferred.
* * * [Benson v. Commissioner, T.C. Memo. 2004-272;
fn. refs. omitted.].
We found that “the exclusive licensing agreement was merely a tax
planning tool, completely lacking in economic substance. * * *
As the arbitrators found, the pattern of payment demonstrates
that Burton [Benson] was merely funneling ERG’s profits to NPI.”
Id.
We find that the disclosures of royalties on NPI’s returns
were misleading. The returns of NPI failed to disclose that it
received the royalties from a related corporation, ERG, or that
Burton Benson acted on behalf of both corporations involved in
the transaction. The returns of NPI failed to disclose that ERG
sold patent rights to NPI and simultaneously licensed those
rights back from NPI in the exclusive licensing agreement. Also,
the “royalties” label listed on the returns of NPI was misleading
and inadequate to apprise respondent that the transactions
constituted a tax planning tool completely lacking in economic
substance.8 Because the royalties disclosures in the returns of
NPI were misleading, they fail to satisfy section
6501(e)(1)(A)(ii).
8 With respect to the 1993 royalty payments, Burton Benson
prepared invoices in response to a meeting with a revenue agent--
“these invoices were not created contemporaneously with payment
and/or the receipt of services.” Benson v. Commissioner, T.C.
Memo. 2004-272.
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