Dharma Enterprises - Page 19

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          own.  SMP provided this assistance before the merger with                   
          petitioner was proposed and with the knowledge that petitioner              
          would be taking over its terminated license.  SMP was run by                
          members of the Nyingma community and controlled by DM and the               
          other Nyingma organizations.  The assistance that petitioner                
          received from SMP supports a finding of a close relationship                
          between DM and petitioner.                                                  
               Petitioner wants to appear as an entity independent from DM            
          with its own desire to earn a profit.  However, petitioner                  
          constantly paid the majority of its after-tax profits to DM and             
          even sustained an after-tax loss during one of the years in                 
          issue.  Moreover, after petitioner paid its profits to DM, it had           
          to go to DM and another Nyingma organization for financing when             
          it needed a new printing press to stay competitive in the                   
          industry.  Petitioner dedicated its profits to benefit Buddhist             
          culture and traditions.  It made no difference to petitioner                
          whether it paid large or small royalties to DM because the                  
          profits given to DM would be used for these purposes.  Because of           
          the close relationship between petitioner and DM, we find that              
          the license agreement was not the result of arm's-length                    
          bargaining.                                                                 
               The determination of the amount of reasonable royalties in             
          this case requires two lines of inquiry:  (1) What assets did               
          petitioner license from DM, and (2) what is the value of the                
          licensed assets?  Both parties presented expert witnesses                   
          regarding the value of the license agreement.  We are not bound             


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