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Pursuant to the licensing agreements with the CFC’s,
petitioner earned a royalty based upon a percentage of the CFC’s
revenues from the sale of the licensed software products. Pursuant
to the licensing agreements with the foreign OEM’s, petitioner
earned a royalty equal to the greater of the OEM’s computer systems
sales or copies of the computer software products distributed.
MS-FSC reported the royalties as foreign trading gross
receipts (FTGR’s). Petitioner paid MS-FSC a commission (based upon
the amount MS-FSC reported as FTGR’s) and deducted the foreign
sales corporation (FSC) commission, using the applicable
administrative pricing rules.
It is the aforementioned royalties and FSC commissions that
are at issue, namely:
1990 1991
Royalties--foreign OEM’s $155,784,783 $150,349,955
FSC commissions per
return 11,477,502 5,019,782
Royalties--CFC’s 55,817,274 112,887,716
FSC commissions per
return 4,948,544 10,321,015
Additional Irish royalties 12,669,936 16,816,754
Additional FSC commissions
per petition 2,914,085 3,867,853
Respondent determined that the disputed royalties were
nonqualifying FTGR’s. As a result, respondent disallowed FSC
commission deductions of $16,426,046 for 1990 (i.e., $11,477,502 +
$4,948,544) and $15,340,797 for 1991 (i.e., $5,019,782 +
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Last modified: May 25, 2011