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Here, as in Good Chevrolet, the Eurotor shareholders
controlled the entity paying the management fees. However, the
compensation that was paid to Eurotor as management fees under
both the MSI and MANV/MDT contracts, expressed as a percentage of
net income, was substantially below 60 percent:
1987 1988 1989
MSI -- 15.0% 4.7%
MANV 6.2% -- --
MDT -- 31.5% 3.5%
The Medieval Times companies successfully tapped into the
tourist markets in Florida and California, and the success was
due in part to the Eurotor shareholders’ selection of locations
and employees. The California management contract that
established a 2-percent-of-gross-production fee was effective
before the profitability of the business was known and was not
modified after the business became profitable.
The facts support the conclusion that the amounts paid to
the Eurotor shareholders were not in excess of compensation that
would be paid for similar services. Therefore, that the payments
were made in proportion to stockholdings does not make the
payments improper. Owensby & Kritikos, Inc. v. Commissioner, 819
F.2d at 1324; sec. 1.162-7(b), Income Tax Regs.
We are persuaded that the MSI and MANV/MDT payments made to
Eurotor as management and consulting fees during the years in
issue were reasonable and for services as required by section
162; therefore, the deductions will be allowed.
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