Plastic Engineering & Technical Services, Inc. - Page 3




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          agreement), effective as of December 10, 1992.  The agreement set           
          the amount to be paid for past and future use of the patent in              
          petitioner’s assembly system.  Under the agreement, petitioner              
          has the exclusive and nontransferable license and right to                  
          manufacture and sell the assembly system covered by the patent              
          from December 10, 1992, until December 31, 2004.  Termination of            
          the agreement may occur upon 10 days’ written notice by either              
          party or default.  The agreement defines the licensee as                    
          petitioner and the licensor as Mr. Tooman.  Amounts paid by                 
          petitioner to Mr. Tooman for future use of the patent are                   
          referred to as royalties.                                                   
               The patent is and has been utilized as a critical component            
          of petitioner’s assembly systems since 1984.  Royalties are equal           
          to 10 percent of the net sales price of all plastic molded                  
          products manufactured through the use of the patented assembly              
          system, also known as the “end product(s)”.  End products are               
          considered sold at such time as an invoice covering the end                 
          products is delivered to a customer of the petitioner, or if not            
          invoiced, at the time that such products are shipped, delivered,            
          or otherwise made available to the customer.  All royalty                   
          payments were paid to Mr. Tooman on a quarterly basis, pursuant             
          to the agreement.                                                           
               Petitioner timely filed its U.S. Corporation Income Tax                
          Return, Form 1120, for taxable year 1995, and utilized the                  






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