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and the reported and taxed income was an adequate rate of return
by comparison to various industry standards. Respondent argues
and, for reasons appearing below, we agree that we need not
belabor or even discuss this evidence.
Respondent determined that the amounts that petitioners
deducted under section 162(a) as franchise and royalty payments
to Manver were not “ordinary and necessary” business expenses
under section 162(a). Respondent’s main contention is that the
transactions that were the basis for the deductions were not bona
fide arm’s-length transactions at fair market value and that the
transactions had no economic purpose or substance. Respondent
further determined that the amounts deducted represented income
to nonresident alien individuals/foreign corporations and that
distribution, apportionment, or allocation is necessary in order
to prevent evasion of taxes and to reflect income clearly as
authorized under section 482.
On brief, respondent agrees with petitioners that
conceptually section 482 would apply because of petitioners’
common control, the shifting of income and deductions, and the
need to reflect income clearly. Respondent contends, however,
that there is no need to resort to allocations under section 482
because the Medieval Times companies owned the intangibles that
they were purporting to license and there was no economic
substance to the transactions.
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