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fifths of 1 percent (.4 percent) of the gross revenue of each
Hyatt International hotel.28 The .4 percent franchise rate, in
addition to accounting for an approximate division of the
elements in the franchise rate including use of the marks and
other intangibles, favors petitioners’ position in one important
respect. In particular, our allocation or reduction of the
franchise rate recognizes, to some extent, that marks and names
are less important in the international hotel marketplace.
C. Allocations of Royalty Income for Trade Names and Marks
to HIC From Its Subsidiaries
HIC’s subsidiaries did not pay HIC royalties for the use of
the Hyatt trade names and marks. In the notices of deficiency,
respondent determined that HIC’s income should be increased for
royalties from HHK, HS, and HP of 1.5 percent of their gross
revenues, the same rate as respondent’s determined royalties from
HIC to Hyatt Domestic. At trial, respondent relied on the BVS
recommendation that a royalty of 33 percent of management fees,
as adjusted, should be allocated from HHK and HS to HIC. The
proposed royalty is to account for trade names and marks and to
“provide a profit for the reservations activities, cover
corporate overhead and subsidize the development activities.” It
28 The royalty allocations should be offset by the $10,000
per hotel license fees that HIC paid to Hyatt Domestic during the
years in issue.
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