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Merritt v. Commissioner, 39 T.C. 257, 270 (1962), revd. on
another issue sub nom. Paragon Jewel Coal Co. v. Commissioner,
330 F.2d 161 (4th Cir. 1964), revd. 380 U.S. 624 (1965); Belknap
v. Commissioner, T.C. Memo. 1989-210. Typically two parties are
considered closely related if they have common owners. However,
petitioner is a nonprofit corporation under the laws of the State
of California and does not have shareholders. Nevertheless, we
find that petitioner is closely related to DM for Federal income
tax purposes and that petitioner and DM did not negotiate the
amount of the royalty payments at arm's length.
Petitioner and DM have a common purpose, to preserve Tibetan
Buddhism. Petitioner's payments to DM satisfy its stated purpose
to financially support the Buddha Dharma. Petitioner has a tax
incentive to characterize the payments to DM as fully deductible
royalties as opposed to charitable contributions for which
deductions are limited under section 170. DM also benefits from
the relationship because it received the profits from a
commercial printing business while minimizing the risks to its
tax-exempt status. Ordinarily, a common purpose between two
charitable or religious organizations will not result in a
finding that the two entities are closely related for tax
purposes, subjecting their transactions to close scrutiny by a
court with regard to the reasonableness of transactions between
them. Based on the facts and circumstances of this case, we find
that petitioner and DM are closely related parties and used that
relationship to claim excessive deductions that are not justified
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