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the manuals and consulting with the local hotel executive staff.
Yet petitioners have provided precious little guidance for us to
determine an appropriate offset for the services supplied by HHK
and HS.35 We are satisfied, however, that our holding allows HHK
and HS reasonably adequate compensation for their efforts as
hotel management companies, unlike respondent’s notice of
deficiency determinations.
As already discussed, franchise rates during the relevant
period were equivalent to about 2 percent of hotel gross
revenues. We have held that the arm’s-length charge for the
Hyatt trade name and marks is .4 percent of hotel gross revenues.
That holding was based on a 2-percent franchise rate, with 1
percent being attributable to expenses and the other 1 percent to
profit on reservations, marketing, expertise, other services, and
a royalty for trade names and marks. We considered one-half of
1 percent as the limit attributable to the royalties. In
arriving at a two-fifths of 1-percent royalty rate we favored
petitioner’s position that trade names and marks are less
important in the international marketplace. The reallocable
services provided by HIC coincide with those provided in a
35 Part of this is due to HHK and HS’s use of hotel staff
in dual capacities and their ability to pass on expenses to the
hotel owners in most of years in issue herein for which they
supplied no records of hours spent or costs incurred, leaving us
without the means to measure their contributions.
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