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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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Last modified: May 25, 2011