Plastic Engineering & Technical Services, Inc. - Page 7




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               Petitioner contends that it was not required to capitalize             
          royalty payments to Mr. Tooman pursuant to section 263A because             
          the payments were “contingent royalties” rather than “minimum               
          royalties”.  Petitioner defines contingent royalties as royalty             
          payments derived from a percentage of petitioner’s net sales of             
          products manufactured through the patent process.  Petitioner’s             
          argument is based on the construction, and effectively the                  
          interpretation, of the last sentence of section 1.263A-                     
          1(e)(3)(ii)(U), Income Tax Regs., shown above.  Petitioner                  
          construes the last sentence of section 1.263A-1(e)(3)(ii)(U),               
          Income Tax Regs., so that the word “minimum” modifies the nouns             
          “payments” and “royalties”.  We disagree.                                   
               Petitioner was in the business of manufacturing products in            
          the fields of industrial chemicals, plastics, materials, and                
          synthetics.  Petitioner acquired the exclusive right to produce             
          certain end products as licensee, and through the use, of the               
          manufacturing process protected under Mr. Tooman’s patent.  The             
          patent was “a manifold assembly system of the type used for                 
          conveying plastic injecting molding material from a central                 
          injection point or sprue to a number of mold cavities or to                 
          multiple points”, thus enabling petitioner to create the end                
          products.  The regulations of section 263A clearly state that               
          “licensing and franchise costs * * * incurred in securing the * *           
          * manufacturing procedure, special recipe, or other similar right           






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