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was an abuse of discretion (arbitrary, capricious, or
unreasonable).
B. Substitution of Experts’ Opinions
Hyatt Domestic and HIC are subsidiaries of different parent
corporations, petitioners HGH and AIC, respectively. Each
petitioner filed consolidated Federal income tax returns with its
U.S. subsidiaries. In the notices of deficiency, respondent
determined that, for the taxable years ending January 31, 1980
through January 31, 1988, the income of Hyatt Domestic should be
increased to reflect royalties from HIC for the use of the Hyatt
trade names and marks. The amount of the determined royalty was
equal to 1.5 percent of the gross revenues of each hotel operated
or managed by Hyatt International group. Similarly, respondent
also determined that HIC’s income for its taxable years ending
December 31, 1976 through December 31, 1983, should be increased
by the same 1.5 percent of the gross revenues and that amount
should be allocated from HIC’s subsidiaries.
Respondent also determined that HIC’s income should be
increased by allocating a certain portion of the management fee
income of its subsidiaries (HHK, HS, and HP). The allocated
portion was the excess of the amount respondent determined as the
arm’s-length charge for management services performed by the
subsidiary, less the amount that was determined to be a royalty.
Respondent calculated arm’s-length charges for management
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