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SBS system without paying any royalties. This is sufficient to
satisfy the requirements of section 1.41-2(e)(2)(ii), Income Tax
Regs.
Respondent contends that Norwest's payments to EDS after May
25, 1987, were contingent on the success of the SBS system. Under
the Participant Agreement between Norwest and Bank One, Norwest was
required to pay $7 million to Bank One for its participation in the
SBS project. The payments were made in installments, beginning
with an initial payment of $694,440 upon execution of the
agreement, followed by monthly payments of $138,890 until February
25, 1988, and followed by monthly payments of $250,000 until July
25, 1989. (The last two payments were deferred pursuant to an
amended agreement between the parties because of delays by EDS in
releasing SBS.) However, under the terms of the agreement, Norwest
could stop making payments and terminate the agreement at selected
times during the interim periods in which development milestones of
the SBS project were being completed. The first development
milestone was completed on May 25, 1987.
Petitioner argues that although Norwest was not obligated to
make payments to Bank One (and EDS) after each interim development
milestone period, there was never an agreement that any amounts
that it chose to pay were recoverable if the research was not
successful. We agree with petitioner.
As to respondent's argument that the payments made to EDS were
contingent on the success of the research, we note that the
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