Medieval Attractions N.V. v. Commissioner, Docket No. 20532-91.
| Court | United States Tax Court |
| Writing for the Court | Cohen |
| Citation | 72 T.C.M. 924 |
| Parties | Medieval Attractions N.V.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Docket Number | Docket No. 20537-91.,Docket No. 20535-91.,Docket No. 8587-93.,Docket No. 8923-93.,Docket No. 16122-92.,Docket No. 15975-92.,Docket No. 20534-91.,Docket No. 20538-91.,Docket No. 20532-91.,Docket No. 20533-91. |
| Decision Date | 09 October 1996 |
v.
Commissioner.
[72 T.C.M. 926]
Lawrence L. Hoenig, Stephen J. Martin, Lisa F. Cetlin, A. Keller Young, and David I. Bass, for the petitioners. Howard P. Levine, Benjamin A. deLuna, Kim A. Palmerino, and Robert F. Conte, for the respondent.
Table of Contents
[CCH Pages]
FINDINGS OF FACT ............................................................... 929
I. Background .............................................................. 930
II. Expansion to the United States .......................................... 930
A. Florida—Personnel and Pre-1986 Corporate Structure .................. 930
B. California—Personal and Pre-1986 Corporate Structure ................ 933
III. Continued Development ................................................... 934
IV. Contracts ............................................................... 935
V. Coopers & Lybrand Planning and Petitioners' Documentation ............... 935
VI. Trademarks and Copyrights ............................................... 942
VII. Section 351 Transfers ................................................... 943
VIII. California and New Jersey Expansion ..................................... 944
A. California .......................................................... 944
B. New Jersey .......................................................... 944
C. C&L Advice .......................................................... 945
IX. Dividends ............................................................... 945
X. Marketing Agreement ..................................................... 946
XI. Commercial Paper ........................................................ 946
XII. Royalty Transactions Relied Upon Federal Tax Returns .................... 948
XIII. Federal Tax Returns ..................................................... 949
A. MTNV/MSI ............................................................ 949
B. MANV/MDT ............................................................ 950
C. Eurotor ............................................................. 950
XIV. Certified Audit ......................................................... 950
XV. IRS Audit ............................................................... 951
[72 T.C.M. 927]
OPINION ........................................................................ 951
I. Management and Consulting Fees .......................................... 951
A. Eurotor ............................................................. 952
1. Services ........................................................ 952
2. Compensation in Proportion to Stockholdings ..................... 953
B. Royal Catering ...................................................... 954
C. A. Gelabert, Santandreu, and Segui .................................. 954
II. Franchise Transactions and Royalty Fees ................................. 955
III. Interest Expense and Guarantee Fees Resulting From Lump-Sum
Franchise Payments ...................................................... 960
IV. Interest Deductions on The Section 351 Transaction ...................... 963
V. The $236,313 That MDT Paid to MSI as a Marketing Fee .................... 965
VI. New Jersey and California Expansion Expenses ............................ 965
VII. Additions to Tax and Penalties for Fraud and Negligence ................. 966
A. Fraud ............................................................... 966
B. Negligence .......................................................... 967
VIII. Substantial Understatement and Increased Interest ....................... 969
A. Substantial Understatement .......................................... 969
B. Increased Interest .................................................. 969
IX. Withholding of Tax at the Source ........................................ 969
A. Interest That MDT and MSI Paid to MABV and MTBV, Respectively ....... 970
B. Franchise Fees That Were Paid by MANV to Manver in Fiscal Year Ended
November 30, 1987 ................................................... 970
C. MDT and MSI Payments to Manver in March 1988 ........................ 970
D. Amounts That MANV, MSI, and MDT Paid to Eurotor as Management
and Consulting Fees ................................................. 971
E. Guarantee Fees Paid to Dapy and Roundabout in Connection With the
Commercial Paper Transactions ....................................... 971
X. Failure To Deposit Withholding Tax ...................................... 972
Table of Entity Abbreviations
ANZ ................................ Australia and New Zealand Bank
Amsrott ............................ Amsrott, N.V.
Attractours ........................ Attractours N.V.
C&L ................................ Coopers & Lybrand
CANV ............................... Corporate Agents, N.V.
Calinvest .......................... Calinvest, N.V.
Celin .............................. Celin, N.V.
Dapy ............................... Dapy, N.V.
Edemle ............................. Edemle, N.V.
Estaspan ........................... Estaspan, Ltd.
Etano .............................. Etano, N.V.
Eurotor ............................ Europea de Espectaculos, Censa Torneo Medievales, S.A.
Futureprom ......................... Futureprom, N.V.
GCI ................................ Glendale Castle, Inc.
Gatetown ........................... Gatetown Limited
Harris ............................. Harris, Lippmam & Co.
Holiday ............................ Holiday Tours, N.V.
Inverspan .......................... Inverspan, N.V.
KDS ................................ Kingdom of Dancing Stallions
LL ................................. Lyon & Lyon
Lebasi ............................. Lebasi, N.V.
Lince .............................. Lince, N.V.
MABV ............................... Medieval Attractions, B.V.
MANV ............................... Medieval Attractions, N.V.
MCI ................................ Meadowland Castle Inc.
MDT ................................ Medieval Dinner & Tournament, Inc.
MICV ............................... Manver International, C.V.
MSI ................................ Medieval Show, Inc.
MTBV ............................... Medieval Times, B.V.
MTNV ............................... Medieval Times, N.V.
Manver ............................. Manver, N.V.
NCB ................................ National Community Bank
Primavert .......................... Primavert, N.V.
Promidux ........................... Promidux N.V.
Protravol .......................... Protravol Limited
[72 T.C.M. 928]
RC ................................. Royal Catering, Inc.
Roundabout ......................... Roundabout Tours, N.V.
SDCI ............................... San Diego Castle, Inc.
Slider ............................. Slider, N.V.
Spectrust .......................... Spectrust, N.V.
TM ................................. Torneo Medieval, S.A.
Wayout ............................. Wayout Tours, N.V.
COHEN, Chief Judge:
Respondent determined deficiencies and additions to tax and penalties in petitioners' Federal income taxes as follows:
Docket No. 20532-91
Additions to Tax
----------------------------------------
Tax Year Sec. Sec.
Ended Deficiency 6653(a)(1)(A) 6653(a)(1)(B) Sec. 6661
11/30/87 ........................... $929,752 $46,488 50% of $185,950
interest due
on $929,752
Docket No. 20533-91
Additions to Tax
-----------------------------------------
Tax Year Sec. Sec.
Ended Deficiency 6653(a)(1)(A) 6653(a)(1)(B) Sec. 6661
$185,
11/30/87 ........................... $929,752 $46,488 50% of 950
interest due
on $929,752
Docket No. 20534-91
Additions to Tax
-----------------------------------------
Tax Year Sec. Sec.
Ended Deficiency 6653(a)(1)(A) 6653(a)(1)(B) Sec. 6661
11/30/87 ........................... $929,752 $46,488 50% of $185,950
interest due
on $929,752
Docket No. 20535-91
Year Deficiency
1987.................................................... $21,600
Docket No. 20537-91
Year Deficiency
1987.................................................... $21,600
Docket No. 20538-91
Year Deficiency
1987.................................................... $21,600
Docket No. 15975-92
Additions to Tax
------------------------------------------------------
Tax Year Sec. Sec. Sec.
Ended Deficiency 6653(a)(1)(A) 6653(a)(1)(B) 6653(b)(1) Sec. 6661
7/31/88 ............................ $808,755 $606,566 50% of $202,189 --
interest due
72 T.C.M. 929
on $808,755
7/31/89 ............................ 869,682 -- -- $652,261 217,420
Docket No. 16122-92
Addition to Tax
Year Deficiency Sec. 6653(b)(1)
1988 ....................................... $1,378,634 $1,078,379
Docket No. 8587-93
Addition to Tax and Penalties
-----------------------------
Sec. Sec. Sec.
Year Deficiency 6653(a) 656(a) 6662(a)
1988 ....................................... $2,742,859 $137,143 $284,657 --
1989 ....................................... 428,739 -- 52,009 $85,747
Docket No. 8923-93
Addition to Tax and Penalties
---------------------------------
Tax Year Sec. Sec.
Ended Deficiency 6653(a)(1) Sec. 6661 6662(a)
11/30/88 ........................... $2,526,905 $126,345 $631,726 --
11/30/89 ........................... 2,929,741 -- -- $585,948
After concessions, the issues remaining for decision are: (1) Whether amounts deducted as management and consulting fees are reasonable payments for services rendered; (2) whether the franchise transactions petitioners entered into were bona fide so that petitioners are entitled to deduct royalty payments, or whether an adjustment under section 162 or 482 is warranted; (3) whether amounts...
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1 practice notes
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Gollin v. Commissioner, Docket No. 16922-90.
...basis for treating them differently. Miller foreclosed any potential liability for increased interest in his cases by making payments 72 T.C.M. 924 prior to December 31, 1984; no interest accrued after that date. In contrast, petitioners made no such payment, and they conceded that the incr......
1 cases
-
Gollin v. Commissioner, Docket No. 16922-90.
...basis for treating them differently. Miller foreclosed any potential liability for increased interest in his cases by making payments 72 T.C.M. 924 prior to December 31, 1984; no interest accrued after that date. In contrast, petitioners made no such payment, and they conceded that the incr......