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royalty of 15 percent of the net revenues should be allocated to
Hyatt Domestic. Respondent’s expert concluded that the royalty
was an equivalent of a profit split accounting for HIC’s capital
and personnel to build an international chain and Hyatt Domestic
contributing chain services and its intangibles, including the
trademarks.
The 1974 licensing agreement between HIC and Hyatt Domestic
was for the use of the various Hyatt trade names and marks. HIC
agreed: To pay Hyatt Domestic a one-time payment of $10,000 per
hotel opened; to pay the costs of registering the trade names and
marks; and that the standards of services and the quality of
products bearing a mark would, at very least, be equivalent to
those adopted or maintained by Hyatt Domestic. For $10,000 per
hotel, HIC received a license to use Hyatt trade names and marks
in perpetuity from Hyatt Domestic. Beyond that, however, the
Hyatt International group received relatively nominal amounts of
chain services from Hyatt Domestic in excess of services provided
for Hyatt Domestic.
Respondent’s deficiency notice determination that Hyatt
Domestic and HIC’s income be increased by a royalty of 1.5
percent of the gross hotel revenues of the Hyatt International
group18 was based on hotel franchise rates. Respondent’s
18 The amount of royalty determined to be included in HIC’s
(continued...)
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