Medieval Attractions N.V - Page 23

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               We are satisfied that the development of the intangibles was           
          paid for by MTNV and that MTNV was the owner of the intangibles             
          as defined in section 1.482-4(f)(3)(ii)(B), Income Tax Regs.  To            
          that extent, we agree with respondent that the structure                    
          supporting the payment of royalties or franchise fees was a sham.           
          There was no “arm’s-length” reason for MTNV/MSI or MANV/MDT to              
          compensate Manver for the use of intangibles that Manver did not            
          create, develop, or, in substance, have the ability to transfer.            
          Accordingly, the expenses were not “ordinary and necessary”                 
          business expenses deductible under section 162(a).  R.T. French             
          Co. v. Commissioner, 60 T.C. 836, 849 (1973).  Respondent’s                 
          determinations with respect to the franchise and royalty payments           
          to Manver will be sustained.                                                
          III.  Interest Expense and Guarantee Fees Resulting From Lump-Sum           
                Franchise Payments                                                    
               Petitioners deducted amounts as interest and guarantee fees            
          in connection with the promissory notes and the lump-sum royalty            
          payments to Manver.  Petitioners argue that there were business             
          reasons for the financing arrangements, that the debt was bona              
          fide, and that the "economic substance sought by the parties was            
          accomplished."  Petitioners support their argument by pointing              
          out that the 12.5- to 15-percent royalty rates made it difficult            
          for petitioners to finance their planned expansion and that the             
          financing allowed them to control the royalty payments during the           
          expansion period.  Petitioners further attempt to support their             
          argument that there was economic substance to the transactions on           



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