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After considering the above factors, we find that the
covenant had economic reality and assign an appropriate value to
it. DM had the ability and expertise to enter into the
commercial printing business. DM stopped printing for commercial
customers in 1985 and sold printing equipment to petitioner.
However, DM continued to print and publish Tibetan Buddhist texts
and art. DM's reputation as a Buddhist printer could easily
translate into a commercial printing business. In addition, DM
had the necessary expertise, equipment, skilled personnel, and
contacts with suppliers to become a commercial printer.
Moreover, DM could adversely affect petitioner's business if DM
competed with petitioner. On the other hand, performing
commercial printing would jeopardize DM's tax-exempt status and
distract from its Buddhist traditions. We believe that DM may
have reentered the commercial printing business in the absence of
the payments from petitioner.
We hold that royalty payments in the amounts of $265,000,
$250,000, and $240,000 for the years in issue, respectively, are
reasonable compensation for the licensed assets and DM's covenant
not to compete.
Petitioner contends that the disallowed portion of the
royalty payments is deductible under section 162 as payments made
to a charitable organization in expectation of commensurate
financial benefit. Sec. 1.170A-1(c)(5), Income Tax Regs.
However, petitioner did not have a reasonable expectation of
financial return in the amount of the payments because it paid
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