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payments to Mr. Paul, we are not convinced that respondent
reasonably interpreted the Area Agreement to deny petitioner a
deduction for the Contested Payments. In arriving at this
conclusion we have considered the rights and obligations of the
parties as set forth in the Area Agreement and the Franchise
Agreements, including: (1) Under the Area Agreement Pizza Park
was the party with the right to receive the Compensation; (2)
petitioner was not a party to the Area Agreement; (3) petitioner
was not wholly owned by Pizza Park or Mr. Paul, but was 49
percent owned by another individual; (4) even Pizza Park's right
to receive the Compensation was conditional; (5) petitioner's
obligation to pay 5.5 percent of its royalty sales as a royalty
fee was unconditional; and, finally, (6) petitioner in fact
satisfied this obligation.
Petitioner's obligation to Domino's for the royalty fees
arose under the Franchise Agreements. Pursuant to the Franchise
Agreements, each store operated by petitioner was unconditionally
required to pay 5.5 percent of its royalty sales proceeds to
Domino's as a royalty. Respondent did not have any indication
that petitioner was relieved of this obligation. Although
petitioner did not pay the entire 5.5 percent royalty fee to
Domino's, respondent was provided with a letter from Domino's
counsel explaining the reason for this (albeit informal)
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