Medieval Attractions N.V. v. Commissioner

• Decision Date: 09 October 1996
• 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.
• Citation: 72 T.C.M. 924
• Parties: Medieval Attractions N.V.<SMALL><SUP>1</SUP></SMALL> v. Commissioner.
• Court: U.S. Tax Court

72 T.C.M. 924

T.C. Memo. 1996-455

Medieval Attractions N.V.¹ v. Commissioner.

Docket No. 20532-91.

Docket No. 20533-91.

Docket No. 20534-91.

Docket No. 20535-91.

Docket No. 20537-91.

Docket No. 20538-91.

Docket No. 15975-92.

Docket No. 16122-92.

Docket No. 8587-93.

Docket No. 8923-93.

United States Tax Court.

Filed October 9, 1996.

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
                

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
                

                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.
                

MEMORANDUM FINDINGS OF FACT AND OPINION

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

...