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royalty fees directly to Domino's. As for the other stores,
petitioner paid 50 percent of the royalty fees due (or 2.75
percent of the royalty sales) to Domino's and the other 50
percent of the royalty fees due (or the other 2.75 percent of the
royalty sales) to Mr. Paul as the sole owner of Pizza Park. The
royalty payments to Mr. Paul were reported by petitioner on Forms
1099.
On each of petitioner's corporate income tax returns for
1992 through 1994 taxable years, petitioner claimed a royalty
expense deduction equivalent to the royalty fees paid to Domino's
and Mr. Paul, or 5.5 percent of petitioner's royalty sales.
Respondent conducted an examination of petitioner's 1992
through 1994 taxable years. During the administrative audit,
petitioner was represented by Paul W. Rowe (Mr. Rowe). Mr. Rowe
provided respondent with copies of the Area Agreement and the
Franchise Agreements. Further, Mr. Rowe provided respondent with
a letter from Domino's explaining the reason why payments had
been made to both Mr. Paul and Domino's. The purpose of this
practice was to ease the administrative burden on Domino's by
eliminating the need for it to issue checks--in effect
eliminating the "middleman" with respect to those payments.
After considering the Area Agreement, the Franchise
Agreements, and the letter of explanation from Domino's,
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