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working in their capacity as Eurotor representatives; they were
not entitled to additional compensation from petitioners. The
additional payments they received were dividends. Therefore, the
amounts paid to Santandreu and Segui individually were dividends
for their interests as shareholders in MANV.
II. Franchise Transactions and Royalty Fees
Petitioners deducted the franchise and royalty expenses on
their Federal tax returns as “ordinary and necessary” business
expenses under section 162(a). Petitioners have elected to apply
the 1994 Intercompany Transfer Pricing Regulations (secs. 1.482-1
to 1.482-8, Income Tax Regs.) to each of the taxable years in
issue as permitted under sec. 1.482-1(j)(2), Income Tax Regs.
Petitioners argue that the deductions satisfy the section 482
regulations on valuation and that no allocation is justified.
They argue on brief that the “pivotal issue here is the value of
the intellectual property that was transferred to the
petitioners, not the nature of the transactions by which they
preserved their rights to use it.” Petitioners maintain that the
extraordinary profitability of the Medieval Times companies
confirms the economic substance of their arrangement with Manver.
Petitioners presented expert testimony and information on
alleged comparables to support the argument that the income that
petitioners attributed to the intangible was justified. The
thrust of petitioners' position is that they could pay unlimited
royalties so long as they received an adequate rate of return;
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