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Among other items, the letter specifically addressed the choice
of entity to own the intangible assets and the question of an
appropriate royalty and management fee rate. The letter noted
that Manver currently owned the intangibles and should license
them to MANV and MTNV for the current year. During the current
year, Forsyth believed that only 20 percent of the royalties
would be subject to tax. Forsyth suggested that a new licensing
structure be implemented once the three-tier system was in place.
Forsyth stated in the draft that, as they had previously
discussed, a “super royalty” fee could be justified if
above-normal profits were due to the nature of the intangible
asset. Forsyth discussed the new provisions to section 482 in
the 1986 Tax Reform Act, supra, and stated, among other things:
To set the appropriate royalty rate would require a
detailed analysis of the worth of the intangible asset
and the effect of the intangibles on the profitability
of the two operating entities. * * * As a working
guide, perhaps a rate somewhere between 10-15% would
seem reasonable. However, before a rate is decided
upon, we will require further consultations with you.
It is important in justifying this high rate that the
franchise agreement between the owner of the
intangibles and the U.S. operating entities detail
precisely the distinctive type of restaurant and
entertainment services being franchised as the
“Medieval Times concept”. We consider that the draft
franchise agreement forwarded under cover of Lyon &
Lyon’s, Attorneys, letter of November 11, 1986 is
appropriate subject to a few general comments. We
consider that reference should be made to the script
document (as amended), called the “copyright book”,
which details the sequence of the performance. In
addition, we consider that the agreement should specify
some of the services that the licensor shall provide to
the licensee. This will include such things as
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