Dharma Enterprises - Page 2

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               Year           Deficiency          Penalty                             
               1991           $209,006            $41,801                             
               1992           192,075                  38,415                         
               1993           204,804                  40,961                         

               After concessions, the issues for consideration are:                   
          (1) Whether the royalties paid to Dharma Mudranalaya for certain            
          intangible assets were reasonable in amount, (2) whether                    
          petitioner is entitled to deduct net operating loss carryovers in           
          taxable years 1991 and 1993, (3) whether petitioner must increase           
          gross sales by $7,095 in taxable year 1992, and (4) whether                 
          petitioner is liable for a section 6662(a) accuracy-related                 
          penalty for each of the years in issue.                                     
                                  FINDINGS OF FACT                                    
               Petitioner had its principal place of business in Oakland,             
          California, at the time the petition in this case was filed.                
          Petitioner operates a sheet-fed, lithographic commercial printing           
          business and provides typesetting, prepress, printing, and                  
          binding services.  Petitioner also prints religious calendars,              
          postcards, and greeting cards through its Amber Lotus division.             
               Petitioner claimed deductions under section 162(a) for the             
          payments to Dharma Mudranalaya (DM), a related entity, pursuant             
          to a license agreement for certain intangible assets in taxable             
          years ending May 31 as follows:                                             
                         Year                Deduction Claimed                        
                         1989                $648,000                                 
                         1990                     785,000                             
                         1991                680,817                                  
                         1992                    854,840                             
                         1993                    788,189                             



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