                         T.C. Memo. 1998-461



                        UNITED STATES TAX COURT



        DHL CORPORATION AND SUBSIDIARIES, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 19570-95, 26103-95.       Filed December 30, 1998.



     Lawrence L. Hoenig, Frank E. Sieglitz, William E. Bonano,

Sarah G. Flanagan, John M. Grenfell, Roderick M. Thompson, Debra

L. Zumwalt, Richard E. Nielsen, Greg L. Johnson, Andrew D.

Mastin,and Susan T. Brown, for petitioners.

     Mary E. Wynne, Erin M. Collins, Cynthia K. Hustad, Michael

J. Cooper, Kevin G. Croke, Kimberley J. Peterson, and James R.

Robb, for respondent.
                               -2-

                            CONTENTS

Findings of Fact . . . . . . . . . . . . . . . .   . . . . . .              4
I.     Background . . . . . . . . . . . . . . .    . . . . . .              4
II.    Stock Ownership and Control . . . . . . .   . . . . . .             13
III.   Operating Agreements Between
       DHL and DHLI and Related Entities . . . .   . . . . . .             21
IV.    Development and Use of the DHL
       Trademark and Logo . . . . . . . . . . .    . . . . . .             26
V.     Financial Condition of DHL . . . . . . .    . . . . . .             33
VI.    Negotiations with UPS . . . . . . . . . .   . . . . . .             37
VII.   1990-92 Transaction With Foreign
       Investors . . . . . . . . . . . . . . . .   .   .   .   .   . .     37
VIII. The Imbalance and Transfer Fees . . . . .    .   .   .   .   . .     61
IX.    Technology and Systems . . . . . . . . .    .   .   .   .     .     66
X.     Respondent’s Determination . . . . . . .    .   .   .   .   . .     68
Opinion . . . . . . . . . . . . . . . . . . . .    .   .   .   .   . .     71
I.     Background . . . . . . . . . . . . . . .    .   .   .   .   . .     71
II.    Were Respondent’s Determinations
       in the Notices of Deficiency
       Arbitrary, Capricious, or
       Unreasonable? . . . . . . . . . . . . . .   . . . . . .             73
III.   The Question of Control . . . . . . . . .   . . . . . .             81
       A. Was There Common Control
           After December 7, 1990? . . . . . . .   . . . . . .             82
       B. Effect of the Trademark Transfer
           After the Foreign Investors Attained
           Their Collective Shareholding
           Majority of the New DHLI/MNV
           Entity . . . . . . . . . . . . . . .    . . . . . .             85
IV.    Ownership and Value of the DHL
       Trademark . . . . . . . . . . . . . . . .   . . . . . .             87
       A. Ownership . . . . . . . . . . . . . .    . . . . . .             87
       B. Value of the DHL Trademark . . . . .     . . . . . .             99
           1. Effect of Section 482 Regulations
               on Allocation of Value. . . . . .   . . . . . . 125
           2. Respondent’s Alternative
               Argument--The Alstores
               Doctrine . . . . . . . . . . . .    . . . . . . 131
V.     Allocation of DHLI Income to DHL
       From Imputed Royalties, Imbalance,
       Transfer, and Network Fees for the
       Period 1974 Through 1992 . . . . . . . .    .   .   .   .   .   .   133
       A. Background . . . . . . . . . . . . .     .   .   .   .   .   .   133
       B. Royalties . . . . . . . . . . . . . .    .   .   .   .   .   .   135
       C. Imbalance and Transfer Fees . . . . .    .   .   .   .   .   .   141
       D. Network Fee . . . . . . . . . . . . .    .   .   .   .   .   .   155
                                  -3-

VI.    Are Petitioners Entitled to Setoffs
       to Any of the Section 482 Allocations
       That Have Been Sustained? . . . . . . . . . . . . . . 159
VII.   Section 6662 Penalties . . . . . . . . . . . . . . . 163
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . 171


               MEMORANDUM FINDINGS OF FACT AND OPINION

       GERBER, Judge:   Respondent determined deficiencies in income

tax and penalties for petitioners’ 1990, 1991, and 1992 taxable

years as follows:

                                        Additions to Tax
                                   Sec.                 Sec.
Year          Deficiency          6662(a)              6662(h)
1990         $194,534,167      $3,036,446.00         $71,740,776
1991           13,912,891       1,599,675.20           2,365,806
1992          216,139,109       1,835,598.00          82,784,448

In addition, respondent denied timely filed claims for refund by

petitioners with respect to the taxable years ended December 31,

1990, 1991, and 1992, in the amounts of $62,851, $920,991, and

$3,208,934, plus interest thereon, respectively.

       The following issues remain for our consideration:

(1) Whether respondent’s determinations in the statutory notices

of deficiency were arbitrary, capricious, or unreasonable; (2)

whether petitioners and certain other entities were commonly

controlled, for purposes of section 482,1 on or after December 7,

1990; (3) whether petitioners realized additional capital gain on

the sale of the DHL trademark; (4) whether petitioners’ postsale

       1
        Unless otherwise stated, section references are to the
Internal Revenue Code as amended and in effect for the periods
under consideration. Rule references are to this Court's Rules
of Practice and Procedure.
                               -4-

retention of a 15-year free domestic use of the DHL trademark

results in capital gain income; (5) whether petitioners, under

section 482, had additional income from forgone royalties;

(6) whether petitioners, under section 482, had additional income

attributable to imbalance and transfer fees; (7) whether

petitioners, under section 482, had additional income from

network fees; (8) whether petitioners correctly computed their

net operating loss carryover deductions for 1990 and 1991;2 (9)

whether petitioners are entitled to setoffs in any year in which

additional section 482 income is finally determined; and (10)

whether petitioners are liable for penalties under section

6662(a) and/or section 6662(h) for taxable years 1990, 1991,

and/or 1992.

                        FINDINGS OF FACT

I.   Background

     Petitioners are DHL Corp. (DHL or petitioner), formed in

1969 in California, and affiliated subsidiaries.   At the time of

the filing of the petitions in these cases, petitioners’

principal place of business was Redwood City, California.

Petitioner was formed by Adrian Dalsey (Dalsey), Larry Hillblom

(Hillblom), and Robert Lynn, and the first initial of each last

name was used to form the “DHL” name.   Lynn transferred his

     2
        Within the context of this issue, petitioners argued that
for purposes of sec. 382 net operating loss limitations, the
ownership of DHL changed on Dec. 7, 1990. On brief, respondent
conceded this point.
                                 -5-

interest to Hillblom and Dalsey, each of whom owned 50 percent of

petitioner as of November 1972, and Dalsey retired in 1984, and

his shares were redeemed or transferred to other shareholders.

     Petitioner’s initial business activity was to pick up and

deliver time-sensitive documents and small packages by means of

regularly scheduled domestic airline flights between Hawaii and

California.    During 1970, a California corporation was formed to

handle documents and packages between Los Angeles and San

Francisco.    Hillblom recruited John T. Atwood (Atwood) and

William A. Robinson (Robinson) from another courier service to

operate the Los Angeles to San Francisco business, which was

merged with DHL on November 11, 1972, at which time Robinson and

Atwood were each given a 7-percent stockholding interest in DHL.

During 1972, a station was established in Hong Kong and

incorporated there under the name Document Handling Limited,

International (DHLI).    DHLI was incorporated in Hong Kong on

March 14, 1972, and its stock was owned 99 percent by DHL and 1

percent by Dalsey.    Po Chung, a Hong Kong resident, was recruited

by Dalsey to act as DHLI’s first manager.    By late 1972 or early

1973, DHL was also offering service through a variety of entities

to Guam, Hong Kong, the Philippines, Japan, Thailand, Australia,

and New Zealand.

     The national and international expansion of DHL’s activity

was accomplished by employees and/or stockholders going to a new
                                -6-

location to establish an operational system/entity to facilitate

pickup and delivery of documents and small packages to and from

the United States and other locations.    During 1972, Robinson

traveled to Sydney, Australia, and met David Allen (Allen), and

they began a pickup and delivery service there.    Early on,

employees who established the service in some locations accepted

equity interests because of insufficient funds to pay them.

     Setting up an international station generally involved the

obtaining of space at the local airport, making arrangements with

the local government customs officials, setting up an office

location, acquiring vehicles, and hiring and training local

managers.   Within a relatively short time, operations were

established in Auckland, New Zealand; Fiji; Jakarta, Indonesia;

Singapore; Kuala Lumpur, Malaysia; Caracas, Venezuela;

Johannesburg, South Africa; and Sao Paulo, Brazil.

     The growth of the DHL network, especially in the earlier

years, was attributed to a free-form approach to expansion.

Although a regimen eventually developed, the business expanded

and grew because of the flexibility and freedom of the management

and employees to provide service to customers that comported with

their customs and locality.   After some problems involving the

Civil Aeronautics Board (CAB), operations were divided between

U.S. and international locations.     Even though there was common

shareholder ownership of the U.S. and international corporate
                                  -7-

entities, the two operations were allowed to develop separately

in a manner that best suited local expansion and success.

Although DHL and DHLI generally operated separately, certain

physical facilities were operated for their joint benefit, and,

occasionally, the companies used networkwide compensation

incentive plans for their executives.    At executive levels, there

was commonality and “secunding” (sharing) of employees by and

between DHL and DHLI.    At the shareholder levels, there was

common control of DHL and DHLI.

     The companies making up the DHL worldwide network cooperated

through the Network Steering Committee (NSC), composed of DHL

shareholders, senior management, and representatives of the three

principal corporations, DHL, DHLI, and Middlestown, N.V.      The

NSC’s purposes were to establish network policies and strategies,

address each company’s network rights and obligations, and

present a uniform organizational image to DHL customers

worldwide.

     One of the things that led to the success of the DHL network

was the use of a flat-rate pricing structure, where the customer

was charged a monthly rate for all shipments.    Under this

approach, profit was sought on the consolidation or volume

strategy.    DHL also developed color-coded pouches with

distinctive markings that were known to customers and made

package handling easier and more efficient.
                                -8-

     In the early 1970’s, one of petitioner’s competitors filed a

complaint with the CAB, alleging that petitioner was not just a

courier but also operated as an international air freight

forwarder.   The competitor complained that, as a result of the

international freight forwarding, petitioner was required to have

CAB operating authorization, which it did not have at that time.

On April 11, 1972, petitioner filed for CAB interstate and

international operating authorization, and the complaining

competitor objected.   CAB regulations prohibited individuals who

were not U.S. citizens from owning more than 25 percent of a U.S.

air freight forwarder.   On May 24, 1973, DHL and Dalsey

transferred their DHLI shares to nominees, ostensibly foreign, of

Po Chung for little or no consideration.   After that transfer of

the DHLI stock, the CAB, on December 19, 1973, authorized DHL’s

status as an interstate and international air freight forwarder.

     Thereafter, the CAB prohibition on foreign “control” of DHL

was a significant factor in corporate and shareholder decisions

to attempt to keep foreign and domestic activities separate.

Operationally, DHL and DHLI, with limited exceptions, were

autonomously managed by their respective officers, but with a

common commitment to the DHL network.   The exceptions involved

DHL’s chief executive officer’s responsibilities over DHLI’s

Canadian, Mexican, and Latin American operations.   The common

commitment to the network was nurtured by the NSC, consisting of
                                 -9-

senior managers representing DHLI and DHL, who met three or four

times a year to exchange information and discuss operational

issues of common interest.    The companies that made up the entire

DHL network were at all times, through September 1992, controlled

by common interests.

     In 1974, Hillblom hired Peter J. Donnici (Donnici), a lawyer

and law professor, to represent DHL in the CAB matter.    About

that time, Hillblom asked Donnici to establish a law office in

Donnici’s name and to continue to represent DHL.    L. Patrick Lupo

(Lupo), a law student of Donnici’s, was employed to assist in the

CAB litigation.   After graduation from law school, Lupo was named

general counsel of DHL.   A few years later, Donnici and Lupo

formed a law partnership that eventually became known as Donnici,

Kerwin & Donnici.   DHL was the firm’s primary client, and it also

did legal work for DHLI and DHL shareholders.    Donnici became

Hillblom’s business and general legal adviser and consultant on

major business decisions.    Donnici and Hillblom were also

personal friends.   DHL, and at one point DHLI, paid expenses of

the Donnici law firm, including rent, overhead, and all salaries.

     In the early 1980’s, Donnici received DHL shares for his

past work for DHL, a third of which he gave to Lupo for work he

had done.   Donnici was also a director of DHL from the early

1980’s until the early 1990’s.    While a director of DHL, Donnici

received a retainer from DHLI in the amount of $48,000 per year.
                                 - 10 -

     After the transfer of DHLI stock to Po Chung and nominees,

DHLI was used for foreign operations and DHL for domestic.         DHL

Operations B.V. (Ops B.V.) was incorporated in the Netherlands on

August 13, 1979, as a wholly owned subsidiary of DHLI.       When

Robinson and Allen formed the Australia station under the name

Document Handling Limited, Australia, Robinson was a DHL employee

who had invested his own funds in this business.       The business

founded by Robinson and Allen eventually became known as

Middlestown, N.V., a Netherlands Antilles company (MNV)

incorporated on June 26, 1979.     For most of the period 1974

through September 1992, DHLI, its subsidiary, Ops B.V., and MNV

were the controlling and operational entities of the

international portion of the DHL delivery network.

     For the period beginning in 1972 and extending into 1992,

DHL was responsible for handling the courier business inside the

United States, and DHLI was responsible for handling the courier

business outside the United States.       Each company serviced

shipments that were:   Solely within its jurisdiction; from its

jurisdiction that were bound for destinations outside its

jurisdiction; and received from outside its jurisdiction with

destination points inside its jurisdiction.       DHL would also

handle shipments from outside its jurisdiction that were merely

passing through DHL’s jurisdiction on the way to another

destination that was outside DHL’s jurisdiction.
                                - 11 -

     For shipments to locations outside DHL’s or DHLI’s territory

or jurisdiction, the documents or packages would be sent to a

“foreign” clearing point of the other company, and they would

then be completely processed by the receiving company.       For

example, if DHL picked up a package in San Francisco that was

bound for a location in Southeast Asia, it would be transferred

to DHLI at one of DHLI’s foreign points of entry, and then DHLI

would take responsibility for customs clearance, further

transportation (frequently across international borders), and

delivery to the foreign consignee.       The entity to whom the

customer first submitted the package was paid by the customer and

retained the payment even though another entity delivered the

package.    Accordingly, in the above example, DHL would retain the

customer’s payment even though a DHLI/MNV company completed the

delivery.   The worldwide air express service operated by DHL and

DHLI was generally represented as, and perceived to be, a single

worldwide delivery system (DHL network).

     In the foreign portion of the DHL network, local operating

companies and independent agents operated under agreements with

DHLI and related companies.   Normally, local operating companies

or agents billed customers an all-inclusive price for shipments

to other service areas.   The local operating companies or agents

normally retained a percentage or predetermined portion of the

revenue received from their customers and remitted the remainder
                                - 12 -

to the DHLI corporate entities as a “network fee”.     Although DHL

was DHLI’s pickup and delivery agent in the United States and

vice versa, neither paid a fee to the other, and each was allowed

to retain the full amount charged to the initiating customer

until 1987.

     The only exception to this reciprocal arrangement was the

on-forwarding fee that DHLI charged to DHL through the 1986 year

for some 10 destinations in the Middle East and Southeast Asia

because of the great distances from the entry gateways to those

destinations.    The reciprocal no-fee arrangement was allowed to

exist during the 1970’s and until 1986.      No specific method had

been developed to account for each shipment during that time.

     As of 1992, the DHL network extended to approximately 195

countries.    In each of those countries (other than the United

States), pickup and delivery functions were performed either by a

local operating company that was a corporate affiliate of DHLI or

MNV, or by an independent agent.     Most of the local operating

companies were subsidiaries of MNV.      Thus, MNV (through its

subsidiaries) provided pickup and delivery services in many

countries, while DHLI operated the network that linked those

countries together.

     As of 1988 the DHL network was, internationally, the third

largest air courier company, with a global market share of about

8 percent, of which somewhat less than 40 percent arose from
                                - 13 -

outbound shipments from the United States.    Around 1985, a study

reflected that DHL ranked first for international service in the

user samples, and its customer awareness was highest among large

shippers who shipped packages both domestically and

internationally.    A 1986 report explained that DHL had a high

name awareness even though the amount spent to advertise the name

at the time was low.    Although DHLI/MNV (international business)

was growing faster and was more successful during the 1980’s, as

of the time of the transactions in question, DHL remained a

important part of the worldwide delivery network.    DHL was

valuable to DHLI/MNV by delivering packages in the United States

and by providing shipments originating in the United States to

the international portion of the network for delivery.    Without

DHL, the DHL network would have had to obtain a delivery agent to

deliver international-origin shipments in the United States and

find new sources of outbound shipments from the United States.

As of the time of the transactions in question, over 20 percent

of the total third-party revenues earned by the DHL network

outside the United States was estimated to be attributable to

DHL.

II.    Stock Ownership and Control

       As of December 1, 1989, 77.61 percent of DHL’s outstanding

stock was owned as follows:    Hillblom, 46.75 percent; Cheiro’s

Consultancy Services Ltd. (Cheiro), 21.59 percent; and W.
                                 - 14 -

Robinson, 9.27 percent.   The remaining 22.39 percent of DHL’s

outstanding stock was owned by others--one of them owning 9.27

percent, and the remainder each owning less than 5 percent.

Cheiro was a Hong Kong corporation, the stock of which was held

50 percent by Allen and 50 percent by Po Chung, from 1977 through

September 1981.    After that time, Cheiro stock was held by Allen

or for his benefit through various entities.

     As of the time of the transactions in question, DHLI’s stock

was held through Mattawan Ltd. (Mattawan), a Hong Kong

corporation, which served as an intermediate entity.     It was

owned 49 percent each by Po Chung and Hillblom, and the remaining

2 percent was held by the Mattawan Employees Trust.     MNV’s stock

was held 49 percent by Robinson and 51 percent by Allen through

several intermediate entities.     From the relatively early

foundations of DHL, DHLI, and MNV, through the time when the

foreign investors became involved in the DHL network, Hillblom,

Po Chung, Allen, and Robinson, collectively and functionally,

were the controlling shareholders of the DHL network entities and

the DHL network.   Amongst the four controlling shareholders,

Hillblom was the most influential.

     In the mid-1970’s Donnici introduced Allen to Stephen J.

Schwartz (Schwartz), a tax attorney, who began representing some

of the DHL shareholders and their related entities.     Schwartz’

focus was on the minimization of tax, which, among other methods,
                               - 15 -

was saved by placing corporate entities in low-tax jurisdictions.

DHLI/MNV, the foreign entities, grew faster than DHL during the

15-year period preceding the 1990 transaction.

     Schwartz formed Management Resources International Ltd.

(MRI) in Hong Kong on January 27, 1981, largely for tax reasons.

William Walden, who was hired by and connected to Hillblom, was

placed as head of MRI.   MRI contracted with DHLI, MNV, and DHL to

supervise and coordinate the DHL network, including “(i) the

development of information and advice, (ii) direction and

implementation of policies relating to marketing, advertising,

operations, electronic data processing, accounting, legal issues

and insurance, (iii) project research and development, and (iv)

strategic planning.”

     Before 1989, DHL, DHLI, and MNV used MRI to enhance the

commercial benefits derived from the DHL network.   The NSC also

had oversight of MRI and, in 1989, agreed to its legal

reorganization.   DHL, DHLI, and MNV management reported through

their regions to the NSC’s chief executive officer.   By 1988,

more than half of MRI’s employees worked in the United States,

and they were covered under DHL’s employee benefits package.     DHL

and DHLI periodically advanced funds to MRI to enable it to meet

its costs.   Bedford Management Group, Inc., held 49 percent of

MRI’s stock.   At the behest of the DHL shareholders, Schwartz,
                               - 16 -

Donnici, Lupo, and Charles Lane (Schwartz’s law partner) held

equal shares of the stock of Bedford Management Group, Inc.

     During 1987, the central management organization was

reappraised, and it was decided that the considerable growth in

the business and increasing competition intensified the need for

a coordinating body that could continue to project and maintain

the DHL worldwide network with uniform operational and service

standards.   In 1988, DHL established the Worldwide Coordination

Center (WHQ) in Belgium.   Three superregions were established,

each with its own chief executive officer (CEO). Po Chung was CEO

for the Asia Pacific region; Patrick Foley, DHL’s CEO, was CEO

for North and South America; and Robert Kuijpers was CEO for

Europe, the United Kingdom, and Africa.

     WHQ was to direct, support, and advise the regions, to

supervise compliance with global policies, and to ensure that the

regions adopted a consistent approach to key issues.   It had

responsibility for establishing strategy, coordinating resource

allocation, and supporting and advising regional management,

including coordinating with DHL, to ensure that operating

procedures and service levels established centrally or recognized

as best demonstrated practice were used throughout the DHL

network.   A Worldwide Services Department was also established to

be responsible for directing and coordinating the integration of

operations and marketing initiatives across regions; coordinating
                               - 17 -

purchased air operations; advancing the worldwide implementation

of best demonstrated practices in operations, sales, and

marketing; and overseeing the global accounts program.

     Lupo was DHL’s general counsel from 1976 through December 1,

1984; CEO for part of 1986; a member of DHL’s board of directors

from the early 1980’s until 1990 and chairman of its board of

directors from 1985 through September 1986; and from the early

1980’s to the time of trial, a minority shareholder of DHL.    In

1985, Lupo moved to England to coordinate the service

requirements of DHL operations in Canada, Mexico, and Latin

America with DHLI and MNV.   Lupo continued in that role until

1988.

     From 1986 into 1988, at the request of Po Chung, Lupo

coordinated the activities of DHL, MNV, and DHLI pursuant to an

agreement with DHLI.   Lupo also performed services for MRI.   He

was involved in MRI’s 1985 global strategic planning for DHL.

From 1988 until 1992, DHL paid Lupo’s compensation and benefits,

but permitted him to serve DHLI.    He performed his coordination

activities as CEO of WHQ beginning in 1988.   In 1990, with the

entry of the foreign investors, Lupo was placed on the boards of

directors of DHLI and MNV.

     DHLI provided necessary capital to DHL through Nirada Corp.

B.V., a Netherlands corporation formed for that purpose.   DHL’s

domestic expansion during the 1980’s was, in part, intended to
                                 - 18 -

increase and protect DHL’s international market share.     Although

the operating officers of DHLI were not in favor of the

expansion, DHLI benefited because it was able to offer more U.S.

delivery destinations to its customers.

     On December 7, 1982, Hillblom acquired 49 percent of the

stock of Mattawan, for which he was to contribute $150,000.       At

that time, DHLI had retained earnings of HK$433,521,201

(approximately US$56 million).     Around that time, Hillblom

borrowed or withdrew several million dollars from DHLI, and

through the 1990-92 transactions no interest or principal was

repaid.    Prior to his 1982 acquisition of Mattawan stock, it was

understood that Hillblom had some form of interest in DHLI.

     Po Chung also acquired 49 percent of Mattawan’s stock, for

which he was to contribute 70 percent of the DHLI stock.     The

employee trust of Mattawan held the remaining 2 percent of its

stock.    On December 20, 1982, Mattawan acquired 120,000 DHLI

shares from DHLI, and on January 24, 1983, Mattawan acquired

49,900 DHLI shares from Po Chung and 99 from Helen Wong.     After

August 8, 1984, Mattawan held all but 1 of DHLI’s shares.       In

1989, Schwartz structured a sale of Hillblom’s 49 percent

Mattawan interest to Po Chung for US$226 million.     The sale

documents were dated December 31, 1989.     During the transaction

with the foreign investors, petitioner’s lawyers advised that the

sale would not be respected for U.S. tax purposes.
                                - 19 -

     On January 15, 1982, the DHL shareholders entered into an

agreement that provided that, in the event of the death of one or

more of them, the deceased’s “entire interest in the DHL

business” would be transferred to the surviving DHL shareholders

with appropriate compensation to the deceased’s estate.    The DHL

shareholders apportioned the net proceeds from the sale of MNV

and DHLI stock in 1990 and 1992, the assets of DHLI and MNV

excluded from the sale, and other assets the DHL shareholders

acquired with funds from DHLI or MNV as follows:   Hillblom

55.4744 percent; Robinson 11.6788 percent; Allen 21.8694 percent;

and Po Chung 10.9774 percent.   The apportionment was not based on

their respective stock ownership and the relative values of MNV

and DHLI.   Instead, it reflected the DHL shareholders’ true

economic arrangement.   The DHL shareholders’ negotiated

apportionment of the proceeds was premised on the relative

contribution each shareholder had made to the success of the DHL

worldwide operation, although Robinson had made a concession to

Allen to cause the deal to be consummated.   This plan for

apportioning the proceeds was based upon a longstanding agreement

or understanding of the DHL shareholders.

     According to the DHLI/MNV shareholders’ agreement, Donnici,

Lupo, and Schwartz were to receive $8,437,500, $8,437,500 and

$2,953,125, respectively, from the proceeds of the 1990 and 1992

transactions.   A portion of the DHL shareholders’ proceeds was
                               - 20 -

used to purchase some of the DHL shares of DHL’s minority

shareholders.   The DHL shareholders agreed that, for purposes of

determining the amount to be paid for the minority shareholders’

shares, DHL was worth one-third of the total offer for all three

companies.

     During the December 1990 through August 1992 period, before

the foreign investors exercised their option, the DHL

shareholders, through and as DHL directors, had veto power over

the following actions by the boards of DHLI and MNV:

     (1)   Any change in the employment of Lupo, P. Y. Kuijpers,

Robert Parker, and Errol Gates;

     (2)   any issuance of DHL shares or other related securities;

     (3)   any debt or lease financing by DHL, with certain

exceptions for refinancings, lease financings below $3 million,

and borrowings totaling less than $5 million;

     (4)   any material change to the business of DHL, except for

a reasonable commitment of DHL’s resources to development of

heavy freight transportation capability;

     (5)   any change in DHL’s auditors or accounting policy.

During that same period, among others, the following actions were

subject to supermajority (would require agreement of some board

members controlled by the DHL shareholders) approval by the DHLI

and MNV boards:

     (1)   Any amendment to the bylaws and memorandum and articles

of association;
                               - 21 -

     (2)   entering into a new business other than one that was

directly related to the principal business of DHL;

     (3)   reappointment of the CEO;

     (4)   any debt or lease financing by DHL if, as a result of

such financing, the total amount of debt and lease financing by

DHL would exceed 75 percent of the total capitalization of DHL.

The limit was 50 percent if the new investors exercised the

“Newco Share Alternative”;

     (5)   any matters that exceeded a fair market value of $20

million, including purchases, sales, and leases, and excluding

the exercise of the DHL trademark option.

III. Operating Agreements Between DHL and DHLI and Related
Entities

     The responsibilities of individual foreign operating

companies were defined in network operating agreements with DHLI

or Ops B.V, its subsidiary, and the responsibilities of the

independent agents were defined in agency agreements with DHLI

and related entities.   In general, an individual operating

company or agent would bill customers in its service area an all-

inclusive price for shipments to other service areas.   For

transactions emanating outside the United States, each service

area’s operating company or agent typically retained a portion of

the revenue received from its customers and remitted the

remainder to the DHLI entities as a “network fee”.
                                - 22 -

     The network fee was intended to compensate DHLI for central

facilities and services--including the air transportation

network, clearinghouse hubs at air terminals, customs clearing

services, know-how, insurance, and advertising--that DHLI

provided for the benefit of the local operating companies and

agents.    Although DHL was DHLI’s pickup and delivery agent in the

United States and DHLI was DHL’s pickup and delivery agent

outside the United States, with extremely limited exceptions, no

fees or costs were paid for those services exchanged between them

until 1987.

     Foreign operating companies and independent agents were

required to use the DHL trademark so as to be identified as part

of the DHL network.   A trademark license was included as part of

the agreements with the local operating companies and agents.

The agreements with foreign local operating companies and agents

generally did not require a separate payment for royalties.    On

occasion, it was necessary to include nominal royalty provisions

in agreements with local operating companies and agents in order

to comply with local law.    Sometimes the royalties were credited

against the network fee.    The network fee remitted to DHLI and

related corporations included payment for the capital

infrastructure, operating expense, know-how, and sometimes a

nominal amount for use of the DHL name provided by the DHL

network.
                               - 23 -

     A memorandum of oral agreement, dated March 15, 1974 (1974

MOA), reflected the agency agreement between DHL and DHLI.    Under

the 1974 MOA, DHLI acted as the foreign pickup and delivery agent

for DHL, and DHL licensed the use of the name DHL to DHLI for the

5-year term of the 1974 MOA.   The 5-year term of the 1974 MOA

could be terminated by DHL on 90 days’ notice.   Upon termination

of DHL and DHLI’s relationship, under the 1974 MOA, DHLI could

not use the name DHL or any similar name for a period of 5 years.

     Between 1974 and 1990, the 1974 MOA was amended on six

occasions.   The first amendment provided (retroactively to 1974)

that DHL and DHLI were each entitled to the revenues and were

responsible for the expenses related to shipments originating in

their respective service areas.   The first amendment provided a

procedure for selecting an arbitrator to arbitrate any

disagreement concerning the allocation of revenues and expenses.

Both parties consented to the jurisdiction of the U.S. District

Court in Guam to enforce the arbitrator’s decision.

     On October 12, 1975, DHL and DHLI entered into the second

amendment to the 1974 MOA which, in part, provided that costs and

revenues of the parties’ electronic data transmission business

were to be shared as agreed or, if no agreement, based upon

reasonable value of services, reasonable value of resources

contributed, with the understanding that the customers DHLI

served presently were the result of DHL’s goodwill.   DHLI again

agreed that it would not use the name DHL or compete with DHL for
                                 - 24 -

5 years after the termination of the agreement.    The second

amendment was for 5 years, and it incorporated and reaffirmed the

terms of the 1974 MOA and the first amendment, including DHL’s

right to terminate the 1974 MOA upon 90 days’ notice.

     The third, fourth, and sixth amendments extended the term of

the 1974 MOA through February 15, 1997.    None of the amendments

changed DHL’s right (under the original 1974 MOA) to terminate on

90 days’ notice.   The fifth amendment provided that the

relationship or agreement would “remain in full force and effect

unless and until * * * disapproved by the United States

Department of Transportation.”     Neither the 1974 MOA nor any of

the six amendments provided for royalties for the use of the DHL

trademark or the DHL name.

     In connection with the involvement of the foreign investors,

a December 7, 1990, agency agreement (1990 agency agreement) was

entered into so that the arrangements between DHLI and DHL would

be set forth clearly and completely in one document.    Under the

1990 agency agreement, DHL had the exclusive right to use and

sublicense the DHL trademark in the United States, and DHLI had

the exclusive right to use and sublicense the trademark outside

the United States.   The agreement established reciprocal

performance standards and financial covenants.    Under the 1990

agency agreement, DHL or DHLI would compensate the other, at cost

plus 2 percent, for its shipments in excess of those performed

for the other.   The 1990 agency agreement was terminable only for
                                - 25 -

cause and had a 15-year term, with an automatic 10-year renewal

if the parties were reasonably satisfied.   It did not contain

DHL’s right to terminate the agreement upon 90 days’ notice and

it did not provide for DHLI’s payment of a royalty for use of the

DHL trademark.    DHL, DHL Airways, and a newly created entity, on

August 18, 1992, entered into an agreement paralleling and

keeping in force the 1990 agency agreement, essentially

substituting a newly created entity for DHLI.

     Upon termination of the 1990 agency agreement, DHLI would be

prohibited from using the DHL trademark anywhere in the world for

a period of 5 years.   The 1990 agency agreement provided that the

laws of New York governed its interpretation.   It was signed by

DHL and DHLI and filed with the U.S. Department of

Transportation.

     In addition to the 1974 MOA and amendments, DHL and DHLI in

their cooperative effort to operate a worldwide DHL network

entered into numerous written and oral agreements.   Some of these

included operational standards such as uniform service criteria

for network performance (percentage of deliveries within an

established time period, data retrieval standards), establishment

of quality of service reporting criteria (systems and measures

for network product volumes, pickup performance, and delivery

performance), service directory format and content, development

of quality control criteria for the network, and development of

global air freight methods for handling larger or traditional air
                               - 26 -

cargo.   There were also agreements concerning customer service

procedures, methods for taking and handling customer calls,

booking shipments, responding to service requests, dealing with

standard inquiries, managing large accounts, responding to

complaints, and tracking or tracing shipments.   Similar

operational standards existed for the network’s ground

operations, gateway operations, and hub procedures.   The 1990

agency agreement, in part, attempted to gather these procedures

and agreements into a single document.

IV.   Development and Use of the DHL Trademark and Logo

      During the early development of the delivery network, the

“DHL” name was generally used, but no standard trademark or logo

was used.   In the late 1970’s, DHLI commissioned and paid for the

design of the first standardized DHL logo, which was then used by

the entire DHL network.   In later years, DHL and DHLI cooperated

on a project to modernize the DHL logo and to develop a Corporate

Identity Manual explaining the use of the redesigned logo, all of

which was cooperatively funded.

      Beginning in 1977, DHL began the process of registering the

DHL trademark.   Several different trademarks or logos have been

registered, including “DHL”, “DHL Flyer”, “DHL Worldwide Courier

Express”, and “DHL Worldwide Package Express”.   DHL bore the cost

for registering the DHL trademark in the United States.

      Ops B.V. and DHLI entered into an agreement on August 13,

1979, stating:   (1) DHL was the “registered proprietor” of the
                                - 27 -

name “DHL” and used that name in its business in the United

States; (2) DHLI licensed the name “DHL” from DHL and carried on

business as a document courier on a worldwide basis; and (3)

DHLI, with DHL’s consent, appointed Ops B.V. as its agent to

establish and improve the network throughout the world, excluding

the United States.    On November 15, 1980, DHLI and Ops B.V.

executed a “Variation Agreement” modifying the 1979 agreement

with DHL’s consent.

     Geoffrey Cruikshanks (Cruikshanks) was hired in 1982 as

legal counsel for the DHLI portion of the DHL network.      On August

1, 1983, Cruikshanks asked Lupo if DHL would sell DHLI the rights

to the DHL trademark outside the United States.      Lupo responded

that the worldwide rights to the trademark could not be sold

without DHL board of directors and shareholder approval, but the

rights for DHLI to use the trademark only in Central America

could be transferred for $100,000.       DHL transferred the Central

America trademark rights to DHLI for $100,000.

     In 1983, Cruikshanks undertook a worldwide registration

program of the DHL trademark.    Although Cruikshanks had been

advised in April 1983 by the DHL general counsel that the DHL

name should be reflected in connection with the registrations

worldwide, that was not done.    Cruikshanks hired John Caisley

(Caisley) to register the trademark.      Caisley was not informed

about the 1974 MOA and DHL’s agreement with DHLI concerning the

DHL trademark, and he registered it in DHLI’s name in various
                                - 28 -

foreign countries. Caisley rendered an opinion regarding DHLI’s

ownership of the DHL trademark in December 1990 when he was not

yet aware of the 1974 MOA and its amendments.     The cost of these

trademark registrations was borne by DHLI.     DHLI protected the

DHL trademark against infringement outside the United States.

Outside the United States, DHLI also took responsibility and bore

the cost of protecting the DHL trademark, including disputes with

terminated agents relating to trademark usage.

       The DHL name had been protected under U.S. trademark law

since 1969 and the DHL logo since 1977.     From 1978 until 1992,

DHL or its subsidiaries were the registered owners of the DHL

trademark in the United States, and they bore the costs of

obtaining those U.S. registrations.      In July 1986, an employee in

the Argentina office asked a DHL employee for permission to alter

the design of the logo used in Argentina.     An MRI employee was

asked to handle the matter, with the request that he direct each

country manager to place next to the DHL logo a registration

symbol showing that the logo was a registered trademark of DHL.

In August 1988, DHL learned that the registrations of the DHL

trademark outside the United States failed to reflect DHL’s

interest in the trademark and the agreement set forth in the 1974

MOA.

       Margaret Phillips, an attorney in the Donnici law firm, and

Cruikshanks discussed a revised trademark license agreement

between DHL and DHLI setting forth DHL’s ownership of the DHL
                               - 29 -

trademark and the practices and intent of the parties.    Margaret

Phillips drafted an agreement in 1988 setting forth the

understanding that DHL licensed to DHLI the right to use the DHL

name and logo.   The agreement, although unsigned, contains

acknowledgment that DHL owned the worldwide rights to the

trademark and that DHLI obtained trademark registrations to be

held in trust for DHL that DHLI would surrender to DHL upon

termination of the license.   The unsigned 1988 agreement was

provided to counsel for the foreign investors, with the statement

that it represented the agreement of the parties during due

diligence for the 1990-92 transaction.

     As of July 1990, intranetwork memoranda contained the

acknowledgment that DHL owned the worldwide rights to the DHL

name and globally used trademark and trade name.   DHLI was

exclusively licensed to use those marks outside the United States

and, for the sole purpose of complying with trademark laws, could

file trademark applications outside the United States as the

“registered owner”.   There was network-wide employee recognition

that DHL was the source of DHLI’s use of the trademark rights.

     For some period of time prior to 1990, Cruikshanks held the

personal view that DHLI owned the trademark outside the United

States, even though he orally and in writing represented to the

contrary.   During the negotiations with the foreign investors,

questions arose about the trademark ownership outside the United
                               - 30 -

States because of DHLI’s registration of the trademark in

numerous foreign countries.

     For purposes of the transactions between DHL shareholders

and the foreign investors, the agreements reflected:

     [DHLI] obtains its rights to the DHL trademark from DHL
     Corp. and has obtained its registrations pursuant to
     such licence agreement. An unwritten agreement exists
     between * * * [DHLI] and DHL Corp. which provides that
     upon the termination of the agency agreement between
     them, * * * [DHLI] will procure DHL Operations B.V. to
     assign all trademark registrations to DHL Corp. without
     consideration and at its cost.

     The three companies, DHL, DHLI, and MNV, operated in harmony

to protect and develop the DHL trademark.    In the mid-1980’s, a

Corporate Identity Manual was produced, setting forth standards

for the DHL logo’s use, including the typeset, colors, and letter

size for each type of use.

     DHL’s advertising represented to the public that it was one

global delivery company worldwide, and customers were made aware

that their documents could be delivered anywhere in the DHL

worldwide network.   Although advertising was accomplished

separately for DHL and DHLI, in the mid-1980’s, DHL’s management

specifically decided that brand awareness and marketing

strategies should have local focus because the markets served

were too dissimilar to support a global program.   Generally, DHL

or DHLI each bore the cost of advertising for its respective

market.   DHL and DHLI did not directly control the quality of the

goods or services that the other provided.
                               - 31 -

     From 1982 through 1992, DHL spent approximately $150 million

for advertising, publicity, and promotion within the United

States as follows:

                  1982                  $6,896,000
                  1983                  12,363,000
                  1984                  14,473,000
                  1985                   9,509,000
                  1986                  11,870,000
                  1987                   9,796,302
                  1988                  11,474,000
                  1989                  22,771,452
                  1990                  19,880,000
                  1991                  19,460,000
                  1992                  15,740,000

     From 1982 through 1992, DHLI, MNV, and subsidiaries spent

approximately $380 million for advertising, publicity, and

promotion outside the United States as follows:

                  1982                  $6,671,000
                  1983                   8,592,000
                  1984                  14,933,000
                  1985                  24,290,000
                  1986                  32,340,000
                  1987                  34,341,000
                  1988                  37,045,000
                  1989                  48,937,000
                  1990                  47,460,000
                  1991                  56,099,000
                  1992                  70,140,000

     The air express business is highly competitive, and

consistency and reliability of service, and to a lesser extent

delivery speed and price, engender customer satisfaction and

loyalty.   In order to provide consistently reliable service, an

air express company must possess and maintain an extensive pickup

and delivery network; an infrastructure of shipment facilities,

planes, vans, and computer systems; tracking technology; and a
                               - 32 -

great deal of know-how and expertise.   These components are of

greater significance to customers than the name or trademark of

the delivery entity.   Generally, a delivery business’ trade name

or trademark will have less value when separated from the

delivery infrastructure.   On occasion, an established delivery

company acquires another operating delivery company solely for

its operating infrastructure, and the acquired company’s name is

phased out and/or discarded.

     As part of the first stage of the transaction with the

foreign investors, the parties agreed to a reservation of rights

agreement in which an intermediate entity was used to transfer

the DHL trademark to Newco (or DHLI Bermuda) and Elan

Operations B.V. (Dutchco).   The reservation of rights agreement

provided that nothing contained in it shall be construed as an

assignment or grant to the intermediate entity of legal or

beneficial ownership in or to the trademark, it being understood

that Dutchco is the owner of all right, title, and interest in

and to the trademark in the United States, and that Newco is the

owner of all right, title, and interest in and to the trademark

outside the United States, in each case subject only to the

rights reserved to the intermediate entity during a so-called

reservation period and thereafter under a license period.    Use of

the DHL trademark by petitioner and its related domestic entities

inured to the benefit of Dutchco and Newco, and the validity of

trademark ownership was incontestable worldwide.   While the
                                  - 33 -

intermediate entity could grant DHL and DHL Airways the right to

use the DHL trademark in the United States, it could not grant

the right to use the DHL trademark to any other person or entity

anywhere in the world.

       In July 1990, there was an agreement in place between DHL

and DHLI providing that, if the transaction with the foreign

investors were terminated, DHLI could not use the DHL name

outside the United States for 5 years.

V.   Financial Condition of DHL

       During the 1980’s DHL’s principal competitors included

Federal Express, United Parcel Service (UPS), and Airborne

Express (Airborne), all of which were larger, had better

economies of scale, and were in better financial condition than

DHL.    In the early 1980’s, Federal Express had an 80-percent

share of the U.S. domestic overnight delivery market, and it did

not regard DHL as a significant competitor.

       In the early 1980’s, however, DHL had 30-40 percent of

the U.S. international outbound market.    Federal Express, which

did not have or offer its own international line of business at

that time, decided to expand into the European market.    Federal

Express did regard the DHL network as the significant competitor

in the European market because of DHL’s existing network and

ability to clear customs.    Federal Express failed to build a

successful European delivery network and lost several hundred

million dollars but continued to offer U.S. outbound service.
                               - 34 -

     In 1983, DHL decided to increase its domestic coverage, both

to protect its share of the outbound market and to handle more

domestic shipments that could improve profitability and provide

more potential for foreign outbound customers.       DHLI management,

however, was not in favor of DHL’s domestic expansion plan.

DHL’s domestic expansion included the establishment of its own

airline (DHL Airways), which was a capital-intensive and

expensive method to ensure expansion capacity and more

individualized and reliable schedules.

     There were also additional capital expenditures for new

locations, vans, couriers, and other equipment, which further

strained DHL’s cash-flow in the mid-1980’s.       Because Federal

Express had an established comprehensive overnight delivery

network, it had achieved the highest volumes and the lowest per-

shipment costs, and as a result, the DHL expansion was

insufficient to effectively compete.       A bigger company with large

volume and existing ground network, such as UPS, was better

equipped to challenge Federal Express.

     DHL bid low on a U.S. Government contract with the General

Services Administration (GSA) to help fill its planes and help

with the extra cost of expansion.       Additional costs, however,

were incurred under the GSA contract because the deliveries were

not at consolidated locations but rather were to specific floors,

offices, or desks.   The low bid and added costs made the GSA
                               - 35 -

contract an additional burden on DHL’s financial condition rather

than helping to facilitate expansion.

     In addition, DHL embarked on its expansion at a time when

the U.S. overnight delivery market was becoming more competitive,

especially because UPS had entered that market.    Federal Express

responded to the market forces by cutting prices, and U.S. market

prices fell steadily during the period when DHL was trying to

expand.   Because of its expansion and the market forces, DHL

experienced increased financial strains and severe cash-flow

problems during the mid-1980’s.

     From 1983 through 1988, DHL’s domestic volume increased

sharply, and its domestic revenues also increased, although at a

lower rate.   Although DHL did achieve some reductions in its per-

shipment costs, the cost of the expansion, price competition in

the U.S. market, and DHL’s failure to achieve the same economies

of scale as its larger competitors caused DHL to sustain heavy

losses, ranging from $5 million to $25 million per year.   Some of

the reasons for DHL’s poor performance in its attempted domestic

expansion were similar to Federal Express’ poor performance in

its attempted foreign expansion in attempting to compete with

DHLI.

     DHL’s losses from 1983 through 1988 were attributable to its

domestic business, not to its outbound business.   During the same

period as the domestic expansion and losses, DHL’s outbound

volume and revenues were steadily increasing.   DHL experienced
                                - 36 -

consistent losses on internal domestic shipments and profits on

its outbound shipments that originated domestically.

       In 1986, DHL retained Bain & Co., Inc. (Bain), to advise it

on how to return to profitability.       Bain analyzed DHL’s cost

structure and, in 1987, developed a cost model specifically for

DHL.    Before that time, DHL did not specifically account for cost

data by product line.    Bain demonstrated that DHL’s revenue from

an outbound shipment was greater than that from a domestic

shipment, and customer density in a coverage area was extremely

important to profitability.    Bain made recommendations based on

these findings, many of which were implemented and had a positive

impact on DHL’s financial performance.       In order to deal with the

increasing debt, financial difficulties, and inability to enlarge

or compete domestically, Bain recommended that DHL consider a

merger with a company in the same industry.

       DHL changed its business strategy during 1988, focusing more

on outbound shipments and less on domestic expansion.        The GSA

contract was allowed to expire, more effective cost control

programs were instituted, and by the late 1980’s to the early

1990’s, DHL started showing profits.       The controlling

shareholders began looking for a suitable company with which to

arrange a merger.
                                 - 37 -

VI.    Negotiations With UPS

       From late 1986 through early 1988, DHL and DHLI negotiated

with UPS concerning a potential merger.        UPS was seeking to gain

access to the operational portion of the DHL network outside the

United States.    UPS sought to accomplish that by purchasing all

of the stock; subsequently, however, it focused on a purchase of

the assets of DHLI, MNV, and DHL.         UPS showed little interest in

the DHL trademark, and no attempt was made to value the DHL

trademark for purposes of the negotiations.        It was UPS’ intent

to phase in its own name and phase out the DHL name over a

transitional period extending about 1-3 years beyond acquisition.

       In 1987, UPS made a “final offer” of approximately

$330 million for most of the assets of the DHL companies

(excluding certain “carved out” assets that UPS did not wish to

acquire).    UPS did not agree to assume any liabilities in

connection with this offer.    The DHL trademark was included in

the assets that UPS proposed to acquire.        Including the carved-

out assets, UPS’ offer would have been approximately in the $450

to $500 million range.    The negotiations with UPS broke down and

failed primarily because the parties could not agree on price.

VII.    1990-92 Transaction With Foreign Investors

        On December 21, 1988, a group of foreign investors made

their first generalized offer.     Ultimately, the foreign investors

were Japan Air Lines Co., Ltd. (JAL), Nissho Iwai Corp. (Nissho

Iwai), and Deutsche Lufthansa Aktiengesellschaft (Lufthansa).
                                - 38 -

JAL and Lufthansa are large, partly government-owned airlines.

The foreign investors were interested in integrating their

airline business with the DHL international delivery network.

Initially, JAL and Nissho Iwai were interested in acquiring a

stock and/or asset interest in the DHL network entities,

including the DHL trademark.    After extensive negotiations and

the entry of Lufthansa into the dealings, on December 7, 1990,

JAL, Lufthansa, and Nissho Iwai acquired a 12.5-percent stock

interest in DHLI and MNV, an option to purchase an additional 45-

percent stock interest to achieve a collective controlling

interest in those entities, and a 2.5-percent stock interest in

DHL.    As of August 18, 1992, the foreign investors exercised

their stock purchase option.

       DHL, DHLI, their shareholders, and the foreign investors

were represented in the negotiations by tax, merger and

acquisition, corporate, and other specialized attorneys,

investment bankers, accountants, and advisers.    Hillblom was the

principal shareholder who was most prominent in deciding the

terms in the negotiations with the foreign investors.    The

foreign investors’ due diligence investigation was comprehensive

and intensive with respect to the DHL companies’ finances,

operations, and assets.

       The December 21, 1988, offer was made by two of the foreign

investors (JAL and Nissho Iwai) to purchase up to 80 percent of

the combined DHL network.    The offer did not contain a purchase
                                - 39 -

price and was conditioned on satisfying the U.S. Department of

Transportation requirement that no more than 25 percent of DHL be

foreign owned.   Counsel for the foreign investors were also aware

that a sale of DHL’s assets, including the trademark, for less

than their fair market value could generate legal repercussions

caused by minority shareholders or creditors.      Allen, Po Chung,

Robinson, and Hillblom did not want to divest 100 percent of

their interest in the DHL entities.      Hillblom, in particular,

wanted to continue his interest in the resulting enterprise.

     JAL and Nissho Iwai concluded, before making an offer, that

the combined value of DHLI and MNV was $450 million.      Before

determining that value, JAL and Nissho Iwai examined valuations

by independent financial advisers and a market forecast by

Arthur D. Little, Inc.    On June 14, 1989, JAL and Nissho Iwai

sent a letter of intent to the selling shareholders, offering to

purchase not less than 60 percent of the stock or net assets of

DHLI and MNV at a price based on the $450 million value for a

100-percent interest.    The letter of intent indicated that the

foreign investors would not acquire an interest in $80 million of

DHL’s class B common stock held by DHLI.

     The foreign investors retained Coopers & Lybrand (Coopers)

to prepare a report on the DHL operations, including DHL, MNV,

and DHLI.   The report, dated May 31, 1989, was based on

information furnished by employees and representatives of the DHL

entities, both through documents and in meetings and interviews.
                               - 40 -

As part of the report, Coopers advised JAL that if common control

of DHL, DHLI, and MNV existed, the Internal Revenue Service (IRS)

might seek to impute a royalty for DHLI’s use of the DHL

trademark.   Also, because of concerns about DHL’s weak

capitalization and lack of profits, Coopers recommended the

infusion of equity capital into DHL while safeguarding it from

transfer pricing problems.   Coopers stated that no royalty should

be charged DHL for continued use of the DHL trademark and that

such a royalty would make it more difficult for DHL to achieve

profitability.   Coopers also noted that a 2-percent royalty might

be imputed to DHL for its royalty-free license to DHLI.

     The foreign investors also wanted to ensure that DHL would

continue to be a cooperating and effective component of the DHL

network.   They were also concerned about the possibility that DHL

could experience financial difficulties or could be acquired by a

competitor, and in that regard they wanted to control the DHL

trademark, which they considered to be a valuable strategic

asset.   The DHL network was the main focus of the foreign

investors.

     During May 1989, in accord with its advisers’

recommendation, JAL decided not to acquire more than a 20-percent

equity interest in DHL to minimize JAL’s exposure to risks,

including those that could occur with respect to U.S. taxation.

The buyers’ and sellers’ representatives were aware of and

discussed concerns that DHL could be exposed to liability, tax
                                - 41 -

and otherwise, for royalties due from DHLI for prior use of the

DHL trademark.    It was estimated by the sellers’ representatives

that the possibility of an imputed royalty could fall in the

range of 4 to 6 percent of DHLI’s annual gross revenues.

     It was at a May 10, 1989, meeting that the sellers’

representatives proposed using the purchase of the DHL trademark

as a vehicle for capitalizing DHL.       It was proposed that any gain

on the trademark sale could be offset by DHL’s net operating

losses and that DHL could license the trademark from JAL and pay

royalties, and DHL’s taxable income could thereby be reduced.

     The foreign investors retained the assistance of an

investment banker, Robert Fleming & Co., Ltd. (Fleming), and in

February 1989, Fleming prepared a preliminary draft report

concerning valuation.    Fleming placed a value ranging from $600

million to $1.3 billion on the global DHL business, depending on

the methodology.    Fleming also estimated that a prospective

purchaser could expect to pay a premium of 40 to 45 percent to

gain control.    Fleming indicated that the DHL name, while

intangible, does have a value that the vendors would expect to

see reflected in the price.    Fleming also suggested that the

selling shareholders might demand additional consideration for

the value of the DHL trademark in the range of 10 to 15 percent

of the DHLI/MNV stock price.    After a more complete due

diligence, Fleming issued a second report dated June 9, 1989,

which determined that DHLI and MNV had a value in a range from
                               - 42 -

$392.2 to $680.4 million and that a control premium of 40 percent

of the purchase price was appropriate.   Peers & Co. (Peers),

which advised JAL, produced its report dated June 9, 1989,

determining that DHLI/MNV had a value ranging from $522 to $580.9

million and that a control premium of 40 to 60 percent of the

purchase price was appropriate.

     During December 1989, the foreign investors’ objectives were

to gain collective control of DHLI and MNV, recapitalize DHL, and

insure DHL’s future financial viability.   On June 14, 1989, the

foreign investors sent letters of intent, offering to purchase

the trademark for $50 million, subject to further evaluation by

the parties, and not less than 60 percent of the stock in DHLI

and MNV based on a $450 million value.   JAL recognized that by

owning the DHL trademark it could gain some control over DHL’s

activities by including in any license agreement provisions

preventing DHL from engaging in economically irrational conduct.

DHLI would also be protected from DHL’s terminating the agency

agreement.   On June 21, 1989, the DHL shareholders advised JAL

and Nissho Iwai, in writing, that although they did not agree to

all the terms in the June 14, 1989, letter, they remained

enthusiastic, and that further financial negotiations were

necessary.   The DHL shareholders’ main concern was price.

     JAL commissioned Arthur D. Little, Inc. (Little), a

consulting firm, to conduct a market study for its negotiations.

Little's March 31, 1989, report projected growth in the small
                               - 43 -

package sector of the air cargo market between 1987 and 2000,

depending on the geographical market.

     During June 1989, Nicholas Miller (Miller) of Coopers, who

was assisting JAL and Nissho Iwai, prepared a rough estimate to

illustrate a conceivable value for the DHL trademark outside the

United States.   Miller arrived at a $25 million estimate, which

was provided to the foreign investors, who considered the

information in their evaluation of the transaction.   In reaching

that estimate, Miller believed that the value of DHL’s trademark

rights was diluted by the agreements between DHLI and DHL and

DHLI’s rights and use.   Miller’s $25 million estimate was based

on the assumptions of $250 million of capital invested and pre-

tax operating profits of $80 million.    He then used a 30-percent

return on capital, or $75 million, leaving a premium of $5

million, which he extended for 5 years to reach a $25 million

estimate.   The foreign investors viewed DHLI as having the right

to use the DHL trademark during the current term of the mutual

agency agreement without additional cost.

     In July 1989, Schwartz questioned the impact of the DHL

trademark value on DHL’s tax position.   DHL shareholders had

proposed a $100 million value for the trademark.   JAL and Nissho

Iwai decided that they would offer $50 million to DHL for the

dual purpose of purchasing DHL’s trademark rights and infusing

capital into DHL.   In their decision to make this offer, JAL and

Nissho Iwai considered DHL’s need for capital and had considered
                               - 44 -

their advisers’ reports and advice.     The $50 million offer was

part of a letter of intent to DHL, offering to purchase the

worldwide DHL trademark.

     JAL and Nissho Iwai initially thought that the DHL trademark

should be transferred to an entity owned by them, but they were

also agreeable to the DHL trademark’s being owned by an entity in

which the selling shareholders retained an interest, if the

sellers bore a proportionate share of the $50 million purchase

price.

     On June 21, 1989, the DHL shareholders advised the foreign

investors of their disagreement with some of the terms of the

letter of intent, and the price offered by the foreign investors

was the key issue concerning the DHL shareholders.     After that,

the parties began negotiating a joint venture arrangement where

the DHL shareholders would retain a 40-percent interest in DHLI

and MNV.   Additionally, Hillblom wanted to retain an interest in

the DHL trademark if the joint venture arrangement were

implemented, and he wanted to retain an interest in DHLI and MNV

because of concern about future stock value if he relinquished

control.

     During discussions of a joint venture between the DHL

shareholders and the foreign investors in July 1989, the DHL

shareholders advised that they wanted a put with a floor for

their minority share, and they refused to grant JAL and Nissho

Iwai a call on the remaining 40-percent interest, but they were
                               - 45 -

willing to accept the initial price if they could share in the

benefits of mutual affiliation by deferring the sale of a

significant minority interest and enhance its value.

     In July 1989, JAL’s and Nissho Iwai’s advisers estimated

that at least one-half of DHL’s value was attributable to the

agency agreement and the goodwill of the DHL trademark.   In late

August 1989, JAL’s and Nissho Iwai’s advisers were advising that

unless they increased the purchase price, the transaction would

not be consummated.

     On September 14, 1989, Peers produced a revised report,

valuing a 100-percent interest in DHLI/MNV at $625 to $700

million.   In late September 1989, the parties discussed placing

the foreign investors in a supermajority position on the boards

of DHLI and MNV, and other provisions were devised to protect the

DHL shareholders’ resulting minority interests against the

foreign investors’ collective majority position.

     On September 28, 1989, JAL and Nissho Iwai extended an offer

to acquire a 60-percent interest in DHLI/MNV based on a $450

million valuation of those companies, which was rejected by the

DHL shareholders.   During late September 1989, the DHL

shareholders asked for a price based on values of at least $500

million for the DHLI and MNV stock and $100 million for the DHL

trademark, which the foreign investors rejected.   The DHL

shareholders stated that the parties were so far apart that
                                - 46 -

further negotiation at that time was useless, and the

negotiations ceased.    The negotiations resumed late in 1989.

     Nissho Iwai, without JAL, approached the DHL shareholders in

October 1989 to see if they would sell control of DHLI/MNV for a

purchase price based upon a total value for the entities of $670

million.   The DHL shareholders reacted favorably.   JAL objected

to Nissho Iwai’s actions.    Also in October 1989, Peers suggested

to JAL that it purchase a 25-percent interest in DHLI/MNV.    Peers

advised that if JAL wanted a controlling interest, it would have

to increase the purchase price to $650 million for DHLI/MNV and

the DHL trademark with a 1-percent royalty.

     On October 19-20, 1989, Hillblom and Mitsuo Ando (a JAL

principal) reached an understanding, which they recommended to

their colleagues, under which JAL would purchase 50 percent of

DHLI/MNV, Nissho Iwai would purchase 10 percent, and the DHL

shareholders would retain 40 percent, based on a $450 million

value of DHLI/MNV to determine the purchase price.    JAL then

advised that it would agree to the above terms only if it

received control of the boards, and Hillblom rejected that offer.

JAL then suggested buying, with Nissho Iwai, a 39-percent

interest in DHLI/MNV.

     Hillblom believed that for control (51 percent or more) of

DHLI/MNV, the purchase price had to be based on a valuation of

$600 million or more; for less than control, the purchase price

could be based on a valuation of $500 million.    Allen strongly
                                - 47 -

opposed the 39-percent offer.    Historically, decisions were made

by unanimous vote of the DHL shareholders.    The DHL shareholders,

especially Allen, were concerned that Hillblom was negotiating

without their consent.

     On November 7, 1989, JAL and Nissho Iwai offered to purchase

up to 40 percent of DHLI and MNV and the DHL trademark for a

total price based on $500 million, with $50 million for the

trademark.   On November 20, 1989, the DHL shareholders advised

that they would sell 30 percent of DHLI and MNV and the DHL

trademark for a price based on a $500 million valuation.    At that

price, the DHL shareholders refused to grant JAL an option to

acquire more shares, and JAL and Nissho Iwai would pay their pro

rata share of the $50 million for the DHL trademark.

     Around December 1989, JAL informed the DHL shareholders that

the DHL trademark could be sold for $50 million to an entity in

which the selling shareholders could retain a majority interest.

Another basic understanding was that the foreign investors could

acquire an interest in DHLI and MNV, but no single investor could

acquire more than 50 percent.    About that time, Lufthansa entered

the negotiations, and it was made aware that the price was not

subject to change.    Lufthansa was advised that the $50 million

payment to DHL for the DHL trademark had been set based on DHL’s

need for capital.    Lufthansa’s counsel understood that the $50

million amount was not based on any appraisal or valuation of the

DHL trademark.
                               - 48 -

     On December 1, 1989, the DHL shareholders made an offer by

which JAL and Lufthansa could each purchase 25 percent of

DHLI/MNV, Nissho Iwai could purchase 7.5 percent, and the DHL

shareholders would retain 42.5 percent.   JAL, Nissho Iwai, and

Lufthansa accepted.   The memorandum of understanding for the sale

of DHLI/MNV shares to JAL and Nissho Iwai, executed in December

1989, provided for the purchase of shares as stated above (25

percent/25 percent/7.5 percent) at a price based upon a $450

million value of DHLI/MNV.   DHL would sell the DHL trademark to

the postalliance entity for $50 million, depending on the tax

effect, and receive an exclusive royalty-free license for the use

of the DHL trademark in the United States.   The foreign investors

were interested in an asset acquisition to minimize their

exposure to liabilities from DHL’s past tax history.    In a

meeting with the DHL representatives during January 1990, JAL and

Nissho Iwai representatives stated that one of their objectives

was to establish a new structure for DHLI/MNV to minimize any

such exposure.   Also, in a January 1990 meeting among the

parties’ representatives, the issue arose of whether the

trademark sale could be considered a sale for $50 million plus

the value of the 15-year royalty-free period, which could

constitute additional income to DHL (the Alstores problem).

     On February 23, 1990, the parties drafted a supplement to

reflect the addition of Lufthansa to the transaction.    First

Boston Corp., investment bankers retained by Lufthansa, valued
                               - 49 -

DHLI/MNV at $400 to $600 million.       It valued the DHL trademark at

$100 to $200 million.

     The foreign investors initially understood that DHL owned

all rights in the DHL trademark throughout the world.      As their

due diligence progressed, however, they became aware of certain

inconsistencies, including the registrations of the DHL trademark

in DHLI’s name throughout the world.      The foreign investors never

resolved these inconsistencies concerning the DHL trademark.

Ultimately, it was agreed that, if the foreign investors

exercised their stock purchase and trademark options, DHL would

transfer all its rights in the trademark, including those it may

have within and without the United States.

     DHL’s lenders consented to a trademark option agreement, but

only on the conditions that:   (1) DHL would “receive full value

(as determined on an arms length-transaction basis) for the

assets it transfers pursuant to * * * [that] Agreement”; (2) DHL

would receive at least $50 million as consideration for the DHL

trademark or as additional equity investments; and (3) DHL would

receive a 15-year royalty-free license to use the DHL trademark.

After the 15-year royalty-free period, DHL would have to pay .75

percent of its gross sales as a royalty for use of the DHL

trademark.   In a communication dated as late as May 10, 1990,

DHL’s legal representative was representing to the lenders that

DHL owned the trademark and licensed it to DHLI.
                               - 50 -

     At a time when the total price for the transaction had been

fixed and the amounts to be allocated or assigned to various

aspects were being negotiated, the foreign investors’

representatives were concerned about the bona fides of the

transaction and that the amounts assigned to various assets were

properly determined for tax purposes.   There was concern that the

focus had been on a $50 million cash infusion into DHL and not on

the price, value, and/or tax attributes of the trademark aspect

of the sale.

     The DHL shareholders and their representatives were

concerned about the tax implications of selling the United States

and worldwide rights to the DHL trademark.   DHL’s representatives

expressed the wish to the foreign investors’ representatives that

the amount received for the trademark be minimized.   One

suggested approach to accomplish that was to form a Dutch holding

company.   The new entity would transfer the foreign DHL trademark

rights to the holding company after purchasing them from DHL for

$10 million in return for a majority interest in the holding

company.   DHL would also transfer the domestic DHL trademark

rights to the holding company in return for a minority interest.

The foreign investors did not agree to this approach, but they

would consider a new or other proposals.   Detailed and protracted

negotiations ensued among the parties’ legal representatives, and

several alternatives were proposed and discussed.
                               - 51 -

     On March 23, 1990, Hillblom met with JAL and Lufthansa

principals to restructure the transaction into two steps.     In the

first step, JAL and Lufthansa would each purchase a 5-percent

interest in DHLI/MNV, and Nissho Iwai would purchase a 2.5-

percent interest.   JAL and Lufthansa would each be granted an

option to purchase up to 25 percent of DHLI/MNV, and Nissho Iwai

would be granted an option to purchase up to 5 percent.    DHLI

would be granted an option to purchase the DHL trademark,

exercisable when the foreign investors exercised the option to

purchase the additional DHLI/MNV shares.   The foreign investors

would receive current board representation based upon the number

of shares they would own after the options were exercised.

     On April 20, 1990, DHL’s representative presented a

structure to the foreign investors for the transfer of the DHL

trademark in an attempt to minimize the tax effects.    The

original memorandum of understanding set a price of $50 million

for the DHL trademark, and under the proposed structure the

foreign investors would contribute $28.75 million and the DHL

shareholders would contribute $21.25 million.   DHL’s

representative proposed the following structure:   before the

execution of a binding contract of sale between DHL and the

foreign investors, the current agency agreement would be extended

for 15 years, including the royalty-free license to DHLI; in the

new agency agreement DHL’s right to terminate at will would be

eliminated; and upon DHLI’s exercise of its trademark option, DHL
                                 - 52 -

would sell to DHLI an interest in the non-U.S. rights to the DHL

trademark.   DHL would also sell to DHLI the U.S. rights to the

DHL trademark, to be encumbered by the 15-year royalty-free

license to DHL.   Both royalty-free licenses, as well as the

elimination of DHL’s right to terminate the agreement at will,

could reduce the value of the DHL trademark sold by DHL.         The

value of the rights sold was to be determined by an appraiser but

would be valued as encumbered.     The transfer of the DHL trademark

from DHL to DHLI followed this basic structure.

     On April 27, 1990, DHL’s representative indicated that an

appraisal of the DHL trademark would have to be obtained in order

to set the exercise price.   Because the transaction was taxable

to DHL, the representative did not want the exercise price to

exceed fair market value, and he noted that the DHL trademark

would be encumbered at the time the option was granted by

reciprocal long-term royalty-free licenses to DHLI and DHL, and

the trademark should therefore be diminished in value.

     The July 9, 1990, trademark option agreement provided that,

upon exercise of DHLI’s option to purchase DHL’s trademark

rights, DHL would “retain an interest in the [DHL] Trademarks in

the form of a fifteen-year royalty-free license to use the

Trademarks in the United States”.         At the time the trademark

option agreement was signed, the parties were still working on a

form of trademark license.   Although there were drafts of a

trademark license agreement and negotiations concerning a license
                               - 53 -

agreement, no trademark license agreement was ever executed by

the parties.

     Ultimately, the parties entered into a reservation of rights

agreement, dated as of September 17, 1992, under which a DHL

company ultimately conveyed:   (1) The U.S. rights in the DHL

trademark to Dutchco, a Dutch subsidiary of DHLI Bermuda; and

(2) the non-U.S. rights in the DHL trademark, to the extent that

DHL or DHL Airways owned any such rights, to DHLI Bermuda

(Newco).   Pursuant to that agreement, DHL retained the right to

use the DHL trademark in the United States without payment of

royalties until September 17, 2007, and if the 1992 agency

agreement was renewed, Dutchco would give DHL an exclusive

license to use the DHL trademark in the United States for 10

years, at a royalty of .75 percent of gross sales.

     The selling shareholders arrived at a $20 million value on

DHL’s trademark rights.   The parties agreed that Bain, who was

familiar with DHL and DHLI from prior engagements, would do the

appraisal.

     DHL’s legal representative in the transaction was

responsible for obtaining the valuation of the DHL trademark from

Bain.   Bain stated that it was asked to value the DHL trademark

on the assumption that it would be conveyed to Newco on a 10-year

royalty-free basis.   On May 21, 1990, Bain began its analysis of

the value.   On May 23, 1990, 2 days after Bain began its

valuation of the DHL trademark, it sent a draft letter stating
                               - 54 -

that Bain could provide some comfort on the issue before it and

that the 1990 value of the right to the DHL trademark in the

United States 15 years after the transaction was $20 million.

DHL’s legal representative noted that Bain should value both U.S.

and the foreign rights to the DHL trademark and that they should

be valued currently but as encumbered by the 15-year royalty-free

license of the international rights from DHL to DHLI and the 15-

year royalty-free license of the U.S. rights from DHLI to DHL.

     Petitioner’s representatives had some doubt about

Cruikshanks’ view that DHLI owned the foreign rights to the DHL

trademark.   In a July 3, 1990, memorandum to Bain, DHL’s legal

representatives explained DHLI’s potential ownership rights in

the DHL trademark and Cruikshanks’ view that DHLI owned the

foreign rights to the DHL trademark.    Bain’s valuation took into

consideration DHLI’s possible ownership rights.   Bain appraised

the trademark rights to be conveyed from DHL to DHLI at $20

million as of July 9, 1990.   There is some confusion as to

whether Bain’s valuation is a current value or a present value of

a future interest.

     The trademark option agreement gave DHLI an option to

purchase the trademark rights of DHL only if the foreign

investors first acquired a controlling interest in DHLI.   The

final trademark purchase and sale agreement, dated as of

September 17, 1992, allocated the $20 million option price at $17

million for the transfer of certain U.S. trademark rights to
                               - 55 -

Dutchco, subject to the reservation of rights agreement, and $3

million to a quitclaim of DHL’s interest in the non-U.S.

trademark rights in favor of Newco.

     The overall transaction with the foreign investors was to

occur in two phases, so that the foreign investors would

initially have a minority of the shares with control of 7 of the

13 seats on the boards of DHLI and MNV in order to learn more

about the DHL network and consider the operational synergy before

deciding to acquire majority interests in DHLI and MNV.    JAL and

Lufthansa could each appoint three board members, and Nissho Iwai

was entitled to appoint one board member.   The remaining six

members of the board were to be appointed by the DHL

shareholders.   The number of board members to be appointed by the

foreign investors was dependent upon whether each of them

exercised its option to acquire additional ownership in DHLI/MNV

in the second phase of the transaction.   The foreign investors

were also entitled to appoint 2 of the 11 board members of DHL,

the remainder being appointed by the DHL shareholders.    Under a

share pledge agreement, dated December 7, 1990, Po Chung,

Robinson, Hillblom, and Allen and/or their entities holding stock

on their behalf, pledged their DHLI and MNV stock holdings to

secure their obligations and liabilities to the foreign

investors.

     On December 7, 1990, under the amended share purchase and

option agreement, the foreign investors acquired 12.5 percent of
                                - 56 -

the stock of DHLI and MNV for $53,125,000 in cash and 2.5 percent

of the common stock of DHL for $3,125,000 in cash.    The

$56,250,000 combined purchase price represented 12.5 percent of

$450 million, without considering the $3,125,000 allocated to the

DHL stock.    Of the 12.5-percent stock holdings in DHLI and MNV,

JAL was to receive 5 percent, Nissho Iwai 2.5 percent, and

Lufthansa 5 percent.    There was no assurance in December 1990,

however, that the foreign investors would exercise their options

to acquire a controlling interest in DHLI when they acquired

their initial 12.5-percent interest in DHLI and MNV.    If the

foreign investors had not been able to, or had chosen not to,

exercise their option to acquire a controlling interest in DHLI

and MNV, they would have had no right to recover the money they

paid for their initial 12.5-percent interest in DHLI and MNV.

     In the second phase of the transaction, the foreign

investors had an option to purchase, in similarly divided

portions, an additional 45-percent interest of DHLI and MNV (for

45 percent of $450 million or $202,509,000).    The foreign

investors also had the Newco alternative, involving the

reorganization of DHLI and MNV into a single entity.    Under the

Newco alternative, each of the foreign investors would contribute

the difference between the amount already paid for the 12.5-

percent interest and an amount that would give JAL and Lufthansa

a 25.001-percent interest and Nissho Iwai a 7.5-percent interest

in Newco.    DHLI would contribute, with certain exceptions, all
                               - 57 -

its assets to Newco, the MNV shares would be contributed to

Newco, and Newco would transfer its remaining 42.498 percent of

its shares to the DHL participants, which included the

controlling shareholders of the DHL network.   The net economic

result of the DHLI/MNV or Newco options was substantially

identical, and in either event the foreign investors would

provide $283,634,000 in cash and obtain a 57.502-percent interest

in DHLI/MNV.   Ultimately, the Newco approach was used, and its

structure and the entities involved were changed several times

before the transaction was consummated, but the net economic

effect remained the same as outlined above.    An August 18, 1992,

agreement contained the final version of the Newco transaction,

and its terms are outlined, along with a diagram to show the

steps, in the appendix to this opinion.

     As of June 7, 1992, the foreign investors exercised their

option to use the Newco alternative to acquire the assets of DHLI

and MNV subject to the liabilities of each entity.   Thereafter,

the foreign investors, together, owned a majority (57.5 percent)

of the stock of DHLI Bermuda (the successor to DHLI and MNV) and

collectively appointed a majority of its board of directors,

which governs by majority vote.   On September 17, 1992, DHL’s

assignee, conveyed to Newco DHLI’s interest in the non-U.S. DHL

trademark.   The board of directors of Newco was to be composed of

six members, of whom one would be appointed by JAL, a second by

Nissho Iwai, a third by Lufthansa, and a fourth by the DHL
                               - 58 -

shareholders.   The remaining two directors were to be appointed

by vote of the other four directors.    The JAL and Lufthansa

directors were each entitled to three votes; the Nissho Iwai

director, one vote; the DHL shareholders’ director, five votes;

and the resident directors, one-half vote each.

     Around the time the second phase of the transaction was

being completed, DHL’s representatives became concerned about a

tax-related issue denominated the “Alstores problem” because of

the holding in Alstores Realty Corp. v. Commissioner, 46 T.C. 363

(1966).   To avoid the problem, DHL’s representatives proposed

several alternative approaches to conveyance of the DHL

trademark.   Each alternative involved the present conveyance of

non-U.S. rights and the retention of U.S. rights to the trademark

by DHL for 15 years with a mechanism that permitted DHLI to

obtain ownership of U.S. rights if DHL did not maintain certain

minimum net worth requirements or on the happening of certain

other events.   Each alternative contemplated payment of $20

million, even though complete transfer of U.S. rights was not to

be for 15 years.   One of the foreign investor’s representatives,

responding in the negative to the proposal, explained that the

transfer of the trademark was to protect the right and interest

of the foreign investors from unexpected situations, such as a

takeover of DHL by its competitors.     He further advised that the

foreign investors had no inclination to accept any of the

alternatives proposed unless it not only satisfied the DHL
                               - 59 -

shareholders’ request to save taxes on DHL but also protected the

foreign investors.

     Another representative of the foreign investors rejected the

proposal and noted that the foreign investors expressed their

willingness to be flexible in considering adjustments to the form

of Newco’s ownership if such adjustments would assist DHL in its

tax planning without sacrificing a key element of the business

deal.

     During the period December 1990 to August 1992, the foreign

investors occupied their positions on the boards of DHLI and MNV

and acted in the roles of directors.    The management of DHL,

however, was maintained with the staffing that it had prior to

the 1990 transaction.   The foreign investors did not participate

in the day-to-day management of DHLI and MNV in that period,

although an employee of JAL and, on occasion, a few employees of

Lufthansa worked in the Brussels office.    There was also an

Executive Committee of the board, consisting of one director

appointed by each of the foreign investors and of the DHL and

DHLI CEO’s.   The Executive Committee's purpose, however, was to

implement decisions of the board.

     The reservation of rights agreement (RORA) reserved to

petitioners the exclusive right to use the trademark in the

United States in the door-to-door package delivery business for

15 years, subject to:   (1) Quality control provisions; (2) a

termination clause that provided for termination if the agency
                                - 60 -

agreement was terminated; (3) petitioners’ exercising reasonable

diligence to prevent infringement; and (4) prompt notice of

infringement.    Petitioners had no right to decide whether to

bring an infringement action.    If an infringement action was

brought, petitioners had to cooperate completely, had to

prosecute the action, and had to bear the cost thereof unless

Dutchco elected to control the action.    Petitioners further

covenanted that they would use their best efforts to promote the

trademark, that they would not register any of the trademarks or

any similar trademark in the United States or any other nation,

and that they would not use the trademark of any competitor or

use the DHL trademark in any way not authorized by the RORA.

       The RORA imposed quality controls on DHL’s manner and use of

the trademark, and DHL could be required to change its manner and

use.    After the RORA was executed, DHLI decided issues relating

to the use of the DHL trademark.     The RORA granted petitioners a

license to use the DHL trademark for 15 years royalty free.

After the 15-year period, the RORA called for a royalty of .75

percent of DHL’s gross sales for its delivery business.    Of the

$20 million price for the DHL trademark, representatives for DHLI

and DHL allocated $17 million to the U.S. rights and $3 million

to the non-U.S. rights.
                                 - 61 -

VIII.     The Imbalance and Transfer Fees

        DHL shipments of domestic origin to foreign destinations to

be delivered through DHLI were termed “outbound” shipments.        DHLI

shipments of foreign origin to domestic destinations to be

delivered by DHL were termed “inbound” shipments.      Shipments of

foreign origin with foreign destinations, but which passed

through the United States and were handled by DHL, were termed

“transfer” or “transit” shipments.

        Before 1983, actual imbalances of shipments were not tracked

or reported by either DHL or DHLI/MNV.      In December 1983,

however, the DHL board recognized the need to examine the ratio

of U.S. inbound to outbound deliveries, as well as the need for

further study of the allocation of air transportation costs for

on-forwarding of international shipments between U.S. points and

a comparison of corresponding international on-forwarding of U.S.

shipments.     Before 1987, neither DHL nor DHLI was compensated if

the outbound or inbound shipments exceeded one another.

Likewise, before 1987, DHL received no compensation for handling

transfer shipments.

        In a 1988 amendment to the 1974 MOA, provision was made for

a cost plus 2 percent compensation on the imbalance of shipments

(imbalance fee).     DHL’s system of determining imbalance shipments

and applying cost plus a percentage markup was modeled after the

system used by postal authorities throughout the world.      The

imbalance fee was implemented for the taxable year 1987 and
                                 - 62 -

forward, although only costs were paid for 1987.         The imbalance

fee was calculated by netting the inbound and outbound shipments

and applying the cost plus 2 percent markup to the difference.

The imbalance cost factor was each company’s average cost of

delivery of packages of any weight and size within its respective

territories, determined annually.         The imbalance fee was

calculated using shipment units without considering the weight of

any particular shipment.

     In 1987, the U.S. Department of Transportation (DOT)

questioned whether the memorandum of agreement, as it existed

before 1987, adequately compensated DHL for the services

performed by DHL for DHLI/MNV.     During due diligence for the 1990

and 1992 transactions, DHL management expressed doubt that the

cost plus 2 percent markup adequately compensated DHL for its

services to DHLI/MNV.   Coopers also questioned whether the cost

allocation system accurately reflected the costs incurred by DHL

in delivering shipments for DHLI/MNV.

     On average, more than one-third of the DHL network’s

international shipments emanated from or were delivered in the

United States, not including shipments that DHL transferred for

DHLI/MNV in transit from one foreign locale to another.

     The DHL cost information models used to calculate the

imbalance fee and the transfer fee were developed by Bain in 1987

and were denominated “Product Line Profitability” (PLP) models.

DHLI also employed a model that was developed by Bain in 1989.
                                    - 63 -

Based on available data for the years 1984 through 1986 (before

development of PLP), it was determined that DHLI suffered an

imbalance of 65,000 shipments in 1984, an imbalance of 496,000

shipments in 1985, and an imbalance of 333,000 shipments in 1986.

     The net imbalance of shipments for 1987 through 1992 was as

follows:

                          DHLI’s                  DHL’s
                        Shipments               Shipments
                        In Excess               In Excess
           Year         of DHL’s                Of DHLI’s

           1987           452,439                 ---
           1988           458,423                 ---
           1989           343,342                 ---
           1990            18,774                 ---
           1991             ---                 162,746
           1992             ---                 212,127

For 1989 through 1992, the following table shows the reconciled

shipment imbalances between DHL and DHLI:

                                                     DHLI’s or
                                                      (DHL’s)
            Shipments from     Shipments from           Net
   Year      DHL to DHLI        DHLI to DHL          Imbalance

   1989       5,795,812             6,139,154         343,342
   1990       6,742,804             6,761,578          18,774
   1991       7,155,582             6,992,836        (162,746)
   1992       7,888,518             7,676,391        (212,127)

Shifts in the imbalance were expected at the time the imbalance

fee formula was negotiated.

     The imbalance suffered by DHLI grew each year from 1991

through 1996.     The imbalance fee negotiated between DHL and DHLI

and included in the 1988 agency agreement was used in the 1990
                               - 64 -

and 1992 agency agreements, after the foreign investors became

involved in DHLI, and continued through the time of trial.

     A costing model (with the acronym “PRISM”) developed by Bain

for DHLI is used for pricing, budgeting, and planning purposes

and is also used in the imbalance fee calculation between DHLI

and DHL.   For 1991, DHLI computed its per-unit cost of delivering

documents and dutiable parcels from DHL at $10.59 and $30,

respectively.   For 1992, the document and dutiable parcel

delivery costs were $10.49 and $28.70, respectively.

     The actual weighted average costs, including the 2-percent

markup used by DHL for 1990 and DHLI for 1991 and 1992, were

$10.19, $15.25, and $15.25, respectively.   The 1988 amendment

also provided for a cost plus 2 percent payment to DHL for its

cost of handling transfer shipments.    DHLI paid this transfer fee

to DHL, and DHLI did not perform a similar function for DHL.

Before 1987, DHL paid a fee to DHLI for delivery of outbound

shipments to certain remote or higher cost destinations (on-

forwarding fee).   The on-forwarding fee was charged to DHL to

cover DHLI’s cost of delivering shipments from the first

international gateway to approximately 10 remote or higher cost

destinations.

     The transfer cost factor was computed annually as DHL’s

average cost of handling a transfer shipment.   For 1987, DHL

received its costs without the 2-percent markup for the transfer

shipments.   The on-forwarding fee was eliminated after 1986.    The
                               - 65 -

transfer fee was determined by multiplying the estimated number

of transfer shipments by DHL’s average cost of handling such a

shipment, and (beginning in 1988) by adding a 2-percent markup to

average cost.   Before 1987, DHL and DHLI/MNV did not employ any

method to determine the average cost per shipment or the volume

of transfer shipments.   From 1987 through 1990, the cost data

used in the transfer fee formula were taken from the PLP model.

     The shipment volumes used in the transfer fee formula were

not readily available when the transfer fee was instituted

because DHL did not focus on how shipments were routed.       To

determine percentages of transfer shipments for 1987 and 1988,

the number of transfer shipments was estimated by counting

shipments originating in or destined for a Latin American

country, Mexico, and/or Canada, with appropriate adjustments, and

interviews with gateway managers.       For 1989, the number of

transfer shipments was estimated by taking a percentage (based on

1987 and 1988 data) of international inbound shipments.       Annual

transfer shipments for 1990 were estimated by sampling transfer

shipments for 1 week, calculating a daily transfer shipment

volume, and applying the percentage of daily transfer shipment

volume to total annual Western Hemisphere shipments.       The same

procedure was used for 1991 as had been used in 1990, but using a

2-week sampling.   A more refined transfer shipment cost

calculation was devised for 1991.
                                  - 66 -

      The transfer fee was carried forward in the 1990 and 1992

agency agreements after the foreign investors became involved in

DHLI.

IX.   Technology and Systems

      Generally, DHL and DHLI each developed its own technology

and systems.   Several software applications, however, developed

by or for DHLI were adapted and used by DHL, and DHL sold DHLI

rights to certain laser technology in 1984.      The sale price was

$14.5 million, consisting of $10 million for the technology

rights and $4.5 million for technical services.      The technology

had been developed between 1982 and 1984 by NetExpress, Inc.

(NetExpress), with funding from DHL.       DHLI did not use the laser

system in its original form; instead, it was used after

modifications.    The major reason for the sale of the laser

technology was to raise capital for DHL during a period of acute

financial problems.

      In addition to the technology that DHL and DHLI each

developed for its own use, certain shared technology was

developed to enable DHL and DHLI to exchange information

electronically.    Beginning in 1987, DHL and DHLI each paid for

this shared technology service on a cost plus 10 percent basis.

This shared technology was developed during the period 1982-92 by

three companies:    NetExpress;   MRI, which managed the “Global

MIS” group; and DHL Systems, Inc. (DHL Systems).
                               - 67 -

     The Global MIS group of MRI was formed in 1986.       In 1987 and

1988, MRI/Global MIS was paid for management information services

by DHL and DHLI in proportion to DHL’s and DHLI’s respective

gross revenues, except for certain communications and other

costs, which were paid on the basis of actual services.       The

management information services and technology functions

performed by MRI were taken over by DHL Systems in 1989.       During

the years 1989-92, DHL Systems was paid for its services pursuant

to an agreement between DHL and DHLI whereby DHL Systems was

reimbursed for its costs in amounts proportionate to DHL’s and

DHLI’s respective gross revenues, except where the anticipated

benefits from particular projects could be allocated according to

specific anticipated usages.   This method of cost allocation was

not changed with the advent of the foreign investors in 1990 or

1992.   From 1986 through 1992, $178 million was expended for

shared technology, consisting of approximately $40.5 million by

DHL and $137.5 million by DHLI, or in a 22.8 percent to 77.2

percent ratio.

     NetExpress was incorporated in 1982 as an 80-percent-owned

subsidiary of DHL.   NetExpress had operated at a deficit, and in

1985 DHL sold to DHLI 200,000 shares of NetExpress stock for $20

per share, an arm’s-length price.       DHL realized a $3.9 million

taxable gain from the 1985 sale of NetExpress stock to DHLI.

     In 1982, DHL provided the initial funding for the NetExpress

tracing and tracking technology referred to as LaserNet.       The
                                  - 68 -

amount of the funding was $290,000.         In 1983 and 1984, DHL made

additional equity investments in and loans to NetExpress totaling

$3,783,000.    In 1985 and 1986, DHL advanced loans to NetExpress

in the amounts of $3,107,128 and $6,000,000, respectively.         In

1986, those loans were assigned from DHL to DHLI in exchange for

an interest-bearing promissory note in the amount of $9,107,128.

The transfers of NetExpress stock and loans to DHLI benefited DHL

by enabling it to raise cash.

     When DHL Systems took over the technology functions of MRI

in 1989, it was owned 50 percent by DHL and 50 percent by DHLI.

As part of this transition, MRI’s technology assets were sold to

DHL Systems.   The sale price was established by an independent

third-party appraisal and was borne by DHL and DHLI in proportion

to their ownership of DHL Systems; i.e., 50 percent by DHL and 50

percent by DHLI.

X.   Respondent’s Determination

     Before issuance of the notices of deficiency to petitioners,

no revenue agent’s report was prepared and no international

examiners’ reports were issued to petitioners.         An economist’s

report was prepared in connection with the examination, but was

not provided to petitioners until a Court order compelled its

production in pretrial discovery.          The pre-notice audit process

was protracted and did not operate on a free exchange of

information basis.   Respondent issued third-party summonses

seeking information about petitioners, and petitioners would not
                                - 69 -

agree to extend the assessment period, triggering the issuance of

the notices of deficiency before respondent’s receipt of complete

information.   The pretrial and trial dialogue in these cases was

contentious.   The parties’ representatives gave no ground on any

point and protracted the trial and pretrial activity.

     The trademark sale adjustments and royalty deficiency notice

determinations were developed by respondent’s economist, Nicholas

Baran (Baran).   This was Baran’s first IRS examination, and he

had never previously valued a trademark.   His prior experience

with discounted cash-flow analysis related to bank loan

portfolios.

     Baran determined a worldwide value for the DHL trademark of

$516,520,000 as of 1990 and $601,380,000 as of 1992.    Baran

valued the 1990 DHL trademark rights at $289,300,000 for domestic

and $227,220,000 for foreign.   Baran valued the 1992 DHL

trademark rights at $350,870,000 for domestic and $250,510,000

for foreign.   He valued the 1990 through 2004 DHL domestic

trademark rights at $140,800,000, and valued those same rights

beginning in the year 2005 at $148,500,000, as of 1990.     Baran

valued the 1992 through 2006 DHL domestic trademark rights at

$170,370,000, and he valued those same rights beginning in the

year 2007 at $180,500,000 as of 1992.

     Baran considered a royalty rate in a license agreement

between DHLI and a controlled subsidiary as a standard for use in

valuing the DHL trademark.   He used a 3-percent royalty rate for
                               - 70 -

his discounted cash-flow analyses and for his trademark royalty

determinations.   Baran relied upon a general industry survey of

the licensing practices of unidentified companies.   The trademark

royalty adjustments proposed by respondent’s trial experts were

less than the adjustments for the corresponding years in the

deficiency notices.

     Walter Earl Huff (Huff) was used as an expert by respondent

in connection with the determination of the imbalance fee,

transfer fee, and network fee adjustments in the deficiency

notices.   Huff’s expertise is in the petroleum industry.

Respondent acknowledged that the 1991 and 1992 deficiency notice

determinations relating to the imbalance and transfer fees are

incorrect because part of the amounts allocated to petitioners

had already been reported on the 1991 and 1992 returns.

     Huff recommended a 15-percent cost plus markup method that

was used in the deficiency notice adjustments.   The notices of

deficiency contained the same cost plus 15 percent markup method

for the transfer fee adjustment as they did for the imbalance fee

adjustment.   Respondent’s trial expert on the transfer and

imbalance fees advocated a 4-percent cost plus markup.

     In determining the imbalance and transfer fee adjustments,

Huff applied the 1987 adjustment amount, $2,019,600, to the years

1975 through 1986 and a prorated amount for 1974, even though the

shipment volumes were much higher in 1987.   Huff did not subtract

the trademark royalties, imbalance fees, and transfer fee
                                - 71 -

allocations from the network fee allocation, causing some

duplicate income allocation.

     In proposing the network fee adjustment, Huff based his

conclusion on available information, and he did not think it

necessary to analyze DHL’s profitability on international

outbound and domestic shipments.

                               OPINION

I. Background

     The nucleus about which the controverted issues revolve is a

transaction among the shareholders of petitioners and related

foreign DHL corporations and foreign investors.    Those investors

collectively became the majority shareholders in the related

foreign DHL entities.   That transaction involved the sale of more

than 50 percent of the portion of the DHL network outside the

United States.   Respondent determined that section 482 should be

employed to allocate income among petitioners and the related

foreign corporations.   Those allocations involve the sale and use

of trademark and the exchange and performance of services with

the potential for arm’s-length pricing issues.    In particular,

respondent determined that, between controlled entities, the DHL

trademark was sold for less than its fair market value, that DHL,

as owner of the trademark, failed to charge royalties for DHLI’s

use of same, that the controlled corporations did not charge or

charged less than an arm’s-length amount for services between

them, and that part of DHLI’s income was allocable to DHL.
                                - 72 -

     Under section 482, the Commissioner has broad authority to

allocate income among commonly controlled corporations to prevent

the artificial shifting of net incomes of controlled taxpayers

and to place them on a parity with uncontrolled, unrelated

taxpayers.    Seagate Tech., Inc., & Consol. Subs. v. Commissioner,

102 T.C. 149, 163 (1994); Sundstrand Corp. v. Commissioner, 96

T.C. 226, 352-353 (1991); see also Bausch & Lomb, Inc. v.

Commissioner, 92 T.C. 525, 581 (1989), affd. 933 F.2d 1084 (2d

Cir. 1991); Edwards v. Commissioner, 67 T.C. 224, 230 (1976);

sec. 1.482-1(b)(1), Income Tax Regs.

     The Commissioner’s section 482 determination must be

sustained absent a showing that he has abused his discretion.

Paccar, Inc. v. Commissioner, 85 T.C. 754, 787 (1985), affd. 849

F.2d 393 (9th Cir. 1988).   Consequently, the taxpayer bears the

heavier than normal burden of proving that the Commissioner’s

section 482 allocations are arbitrary, capricious, or

unreasonable.    Your Host, Inc. v. Commissioner, 489 F.2d 957, 960

(2d Cir. 1973), affg. 58 T.C. 10, 23 (1972); Seagate Tech., Inc.

& Consol. Subs. v. Commissioner, supra at 164; G.D. Searle & Co.

v. Commissioner, 88 T.C. 252, 359 (1987).   Whether the

Commissioner's discretion has been abused is a question of fact.

American Terrazzo Strip Co., Inc. v. Commissioner, 56 T.C. 961,

971 (1971).   In reviewing the reasonableness of the

Commissioner’s allocation under section 482, we focus on the

reasonableness of the result, not the details of the methodology
                               - 73 -

employed.   Bausch & Lomb, Inc. v. Commissioner, supra at 582; see

also Eli Lilly & Co. v. United States, 178 Ct. Cl. 666, 372 F.2d

990, 997 (1967).

II. Were Respondent’s Determinations in the Notices of
Deficiency Arbitrary, Capricious, or Unreasonable?

     As explained above, taxpayers generally bear a heavier than

normal burden of proving that the Commissioner’s section 482

allocations are arbitrary, capricious, or unreasonable.

Petitioners argue that their burden should be lessened once they

can show that the notices of deficiency are arbitrary,

capricious, or unreasonable.   Petitioners contend that the

determinations in the notices are significantly different from

the determinations advanced by respondent’s experts at trial.

Because of that and a procedural question, petitioners assert

that their burden in these cases should be to show, by only a

preponderance of the evidence, that the prices with any commonly

controlled entities were consistent with an arm’s-length price,

citing Seagate Tech., Inc. & Consol. Subs. v. Commissioner, supra

at 164.   Respondent contends that the actions taken and

determinations made were reasonable under the circumstances.

     Initially, petitioners point out that respondent did not

issue or provide petitioners with any notice or report of the

proposed adjustments before issuance of the notices of

deficiency.   Petitioners then outline four instances where they

contend that respondent’s notice determinations were either
                                - 74 -

abandoned and/or ignored, and differing amounts and/or theories

were advanced by respondent through expert witnesses.

      Respondent does not deny that petitioners were not provided

reports before the issuance of the notices of deficiency.

Respondent generally explains that pre-notice reports were not

compiled and/or provided because petitioners postponed meetings,

delayed production, were uncooperative, and attempted to

“mislead” respondent with respect to the relationship between DHL

and DHLI.

     In that regard, the Court has observed that, throughout the

pretrial and trial portions of these cases, the parties were

contentious and intractable.    During the pretrial and trial

portions of these cases, respondent’s third-party summonses

seeking information about petitioners remained in litigation in

other courts.    In the proceedings before this Court, the parties’

representatives gave no ground on any point, causing, in some

instances, the unnecessary protraction of the trial and parts of

the pretrial portion of these cases.     Petitioners did not agree

to extend the period for assessment, triggering issuance of the

notices of deficiency prior to respondent’s receipt of complete

information.    The production of documents and responses to

interrogatories by petitioners lingered beyond the commencement

of the trial and necessitated certain procedural adjustments to

accommodate generally dilatory compliance by petitioners and the

untimely receipt of information by respondent.    This pattern of
                                 - 75 -

activity likely permeated the administrative portion of these

cases, as respondent contends.

     As a result, respondent’s determinations were based on the

information that had been made available.         The issues in these

cases are, in substantial part, factual and concern the value or

price of an asset or service.    A vastly disproportionate amount

of the transcript and record consists of a “battle of experts”.

After the notice of deficiency was sent, respondent received

substantial amounts of information that had not been available to

respondent prior to the issuance of the deficiency notices.

Respondent’s experts used that information to reach their

conclusions.   The adjustments in respondent’s notices exceeded

the amounts respondent’s experts opined for purposes of trial.

     The examples cited by petitioners in support of their

position include the trademark determination.         During the

administrative portion of this controversy, respondent’s

economist, Baran, estimated that the worldwide value of the DHL

trademark was $516.5 million on the first of two valuation dates,

and $601.4 million on the second.         Respondent’s experts, using

differing assumptions and factual information, reached

substantially reduced amounts.     Baran also developed a trademark

royalty based on a 3-percent rate relying on certain comparables.

He concluded that for the 1974 through 1992 period the arm’s-

length royalty should have been $232,109,000, whereas

respondent’s trial experts, again using differing assumptions,
                                 - 76 -

concluded that arm’s-length royalties should be $83,129,000 for

1982 through 1992 or $57,095,000 for 1984 through 1992,

respectively.

     With respect to imbalance and transfer fees, duplications

were contained in the notices of deficiency.        The imbalance

adjustments included the cost of deliveries that had already been

reported on petitioners’ returns.         The determination, in addition

to the cost amounts, added a 15-percent markup instead of the 2-

percent markup reported.   Respondent’s trial expert, however,

recommended a 4-percent markup, and respondent, for purposes of

trial, conceded that the determination was overstated to the

extent of the cost duplication portion of the above-described

adjustment.

     Finally, with respect to the network fee, the adjustment

contained some duplication.     Respondent’s trial expert on this

subject used a differing terminology to describe his proposed

adjustment, and petitioners argue that either respondent has

therefore abandoned the network fee adjustment set forth in the

notices of deficiency or the network fee determination must be

regarded as arbitrary, capricious, and unreasonable.        Respondent

counters that the network fee adjustment has not been abandoned

and the approach taken in the notices and by the respondent’s

trial expert are reasonable.3



     3
        Due to our holding on the network fee issue, it is
unnecessary to decide the parties’ contentions.
                                - 77 -

     Petitioners seek to lessen their burden with respect to each

and every section 482 adjustment in controversy.     Petitioners’

burden is to show that each section 482 adjustment is arbitrary,

capricious, and unreasonable.   To do that, taxpayers normally

show that the questioned transactions were conducted under an

arm’s-length standard.   For purposes of seeking a lesser burden,

petitioners do not address the ultimate question of what the

proper arm’s-length standard is.     Instead, they argue that

respondent’s notices of deficiency are generally arbitrary

because of failure to provide advance notification of the

proposed determinations and because each of the section 482

determinations differs from the amounts, positions, and evidence

offered by respondent at trial.

     In Perkin-Elmer Corp. v. Commissioner, T.C. Memo. 1993-414,

the Commissioner based the notice of deficiency section 482

determination on a particular theory and then abandoned that

theory before trial.   It was held that those circumstances were

sufficient for the taxpayer to meet “its burden of showing

respondent’s allocations to be arbitrary, capricious, or

unreasonable.”   Therefore the taxpayer in that case needed only

to show that the questioned transactions were arm’s length.

     In National Semiconductor Corp. & Consol. Subs. v.

Commissioner, T.C. Memo. 1994-195, the determinations in the

notice of deficiency were based on a different methodology than

the Commissioner’s expert relied on at trial.     In addition to the
                               - 78 -

differing methodology, the Commissioner’s proposed reallocations,

for purposes of trial, were substantially lower than the notice

determination amounts.   Finally, at the trial in that case, the

Commissioner did not support the notice determination and,

instead, relied on the trial expert’s analysis of the case.

     In these cases, respondent’s failure to prepare or provide

pre-notice reports is not a violation of petitioners’ rights.

See Luhring v. Glotzbach, 304 F.2d 560 (4th Cir. 1962); Vallone

v. Commissioner, 88 T.C. 794, 806-807 (1987); Estate of Barrett

v. Commissioner, T.C. Memo. 1994-535, affd. 87 F.3d 1318 (9th

Cir. 1996).   Nor is respondent’s failure to provide pre-notice

reports a procedural flaw that, per se, renders respondent’s

notice determinations arbitrary, capricious, or unreasonable.

That is especially true here where petitioners’ resistance and

dilatory approach was, to some extent, the cause of respondent’s

agents’ inability to provide pre-notice reports to petitioners.

     For the most part, petitioners complain of the excessive

nature of respondent’s notice determinations or that respondent’s

trial experts’ reports and testimony would support substantially

smaller income tax deficiencies.    That, in itself, does not make

respondent’s determinations arbitrary.   Those matters are the

essence of the controversy here.    Respondent’s trial and briefing

positions do not result in an increased adjustment from those in

the notices of deficiency.   Nor has respondent advanced a new

legal theory or issue for which respondent would bear the burden
                                 - 79 -

of proof.   Unlike the circumstances in Perkin-Elmer Corp. v.

Commissioner, supra, respondent has not abandoned the notice

positions and advanced new ones.4         Petitioners have not shown

that any of respondent’s section 482 determinations are

arbitrary, capricious, or unreasonable on the basis of the

information available to respondent at the time of the issuance

of the notices of deficiency.5    We hold that respondent’s failure

to provide pre-notice reports, either alone or in conjunction

with the larger amounts determined in the notices as opposed to

the trial position amounts, does not provide a predicate for the

remedial action sought by petitioners.

     In this setting, respondent’s notice determinations were not

shown to be arbitrary, capricious, or unreasonable.         Although

respondent’s trial position amounts are considerably less than

the amounts determined in the notices, with the exception of the

network fee adjustment, respondent’s notice positions were not

abandoned or ignored.   To some extent, the reduced adjustments


     4
        Our reference to “positions” here does not include the
“network fee adjustment”.
     5
        Petitioners ask us to judge respondent’s actions in the
notices of deficiency. Obviously, we cannot judge whether
respondent’s determinations were arbitrary, capricious, or
unreasonable on the basis of the information available to
respondent after the trial record has been made, unless that
information was available to respondent when the determination
was made. In the context of petitioners’ preemptive approach, we
consider respondent’s actions on the basis of the knowledge that
was made available by petitioners. To do otherwise would
encourage taxpayers to keep from the Commissioner the information
they possess and then criticize the Commissioner’s lack of
information to the taxpayers’ advantage.
                                - 80 -

proposed by respondent at trial are attributable to information

acquired by respondent after issuance of the notices of

deficiency.    Ultimately, the factual information exchanged by the

parties and then offered into evidence forms the basis for our

opinion.    The amounts decided are considerably less than the

amounts determined in the notices.       The decided amounts, however,

fall somewhere in between the extreme trial positions of the

parties.

     The large difference between the amounts contained in

respondent’s notices and those proposed at trial and the

differences between the parties’ trial positions are largely

attributable to the assumptions adopted by the parties’ experts.

For example, respondent’s in-house expert used a 15-percent

markup on the imbalance costs, whereas respondent’s trial expert

used a 4-percent markup.    Ironically, because petitioners’ expert

advocated a full cost approach to the imbalance adjustment, he

was able to appear magnanimous by using the same 15-percent

markup that had been used by respondent’s in-house expert in the

notice.    This serves to illustrate that differences in

assumptions made large differences in the determinations and the

parties’ positions.    The assumptions relied on by respondent were

not arbitrary, capricious, or unreasonable considering the

circumstances here.

     Accordingly, respondent’s notice determinations, although

resulting in determinations at the outside margins, represent a
                                     - 81 -

reasonable protective approach based on the information that was

made available and the conditions extant at the time of the

determination.       Therefore, petitioners have not shown that they

should be relieved from showing an abuse of discretion by

respondent.6

III.       The Question of Control

       Respondent’s authority to allocate income is predicated on

the entities’ being commonly controlled.           For purposes of section

482, “control” is broadly defined to include “any kind of

control, direct or indirect, whether legally enforceable, and

however exercisable or exercised.”            Sec. 1.482-1A(a)(3), Income

Tax Regs.       In determining whether entities are commonly

controlled, the courts look to “reality of control” rather than

just to actual stock ownership.         Grenada Indus., Inc. v.

Commissioner, 17 T.C. 231 (1951), affd. 202 F.2d 873 (5th Cir.

1953).       Further, when the interests controlling one entity and

those controlling another have a common interest in shifting

income from the former to the latter, entities may be considered

commonly controlled.       This is especially true where one entity

deals with another on other than an arm’s-length basis.           Sec.

1.482-1A(a)(3), Income Tax Regs.



       6
        Ultimately, our ruling on this aspect has no effect on
the outcome of the issues. In one instance, petitioners showed
an abuse of discretion; in all others the outcome was based on a
preponderance of the evidence to decide fair market value or
arm’s-length prices. The ultimate findings or holding generally
fell somewhere in between the parties’ trial positions.
                               - 82 -

     Because petitioners argue that DHL and DHLI were operated in

a separate manner, and because of the two-step progression of the

transaction with the foreign investors, the question of control

must be addressed at three different points.    First, there is the

period prior to 1990 when there was some common stock ownership

between DHL and DHLI.   Then we must consider the interim period

1990 to 1992 when the foreign investors collectively had less

than a majority of the stock holdings and had a majority of the

DHLI board seats.   And finally, there is the period after the

foreign investors exercised their “option” collectively to

acquire a shareholding majority.

     Until the time of trial, petitioners denied the existence of

any common control within the meaning of section 482.    At trial,

petitioners conceded that the requisite control existed before

1990, so that the remaining controversy as to control concerns

the 1990 to 1992 period and the period after the foreign

investors gained collective shareholding control of the foreign

portion of the DHL network.

     A. Was There Common Control After December 7, 1990?

     Petitioners contend that the foreign investors gained

control of DHLI/MNV as of December 7, 1990, when they became able

to exercise their contractual right to appoint 7 of the 13 board

members of DHLI’s and MNV’s boards.     Petitioners acknowledge that

the DHL shareholders retained legal title to a majority of the

outstanding shares, but they argue that actual control should be
                                 - 83 -

distinguished from legal ownership.       Even if the DHL shareholders

are found to have controlled the entities within the meaning of

section 482, petitioners argue that the transfers of the DHL

trademark did not occur until September 17, 1992, about 1 month

after the August 18, 1992, exercise by the foreign shareholders

of the option enabling them to collectively hold 57.5 percent of

the shares in the new corporate entity that replaced DHLI/MNV.

     Conversely, respondent argues that the DHL shareholders

maintained the requisite control after December 7, 1990, because

the foreign investors collectively held only 12.5 percent of the

outstanding stock until their exercise of the 1992 option.

Respondent attempts to minimize the foreign investors’ board

control by contending that they did not have an agreement among

them to vote their shares to elect directors.      In addition,

respondent contends that certain limitations placed on the

board’s powers lessen the effect of the foreign investors’ making

up the majority of that body.    Finally, respondent argues, in the

alternative, that section 482 would permit reallocation because

the common control factor should be measured at the time the

parties arrange and agree to the transaction in question and not

necessarily at the time the transfer(s) or services occur.

     We agree with respondent that the requisite control existed

after the first stage of the transaction (December 7, 1990), even

though the foreign investors collectively had been given the

ability to control the boards.     One of the underlying purposes of
                               - 84 -

the two-stage transaction was the comfort of the foreign

investors.   They had conducted a thorough due diligence and

uncovered a number of concerns.   The creation of a two-stage

transaction permitted them to become involved in the entities in

order to decide whether they wished ultimately to acquire a

larger financial commitment and shareholding, along with the

acquisition of the DHL trademark.

     Initially, the foreign investors collectively purchased a

12.5-percent interest in DHLI/MNV, but they would not have been

able to recoup their investment if they had not opted

collectively to acquire an additional 45 percent of the entities

and/or the DHL trademark.   Their ability to control the boards

gave them a form of assurance or security to protect their

initial investment and to permit closer scrutiny and involvement

if they so desired.   The boards, however, did not control the

day-to-day operations of DHLI/MNV, and the foreign investors’

employee presence in the operating entities was de minimis during

the interim period (late 1990 to late summer 1992).

     The structure of the transaction through the interim period

also included several assurances and protections for the DHL

shareholders.   For example, the DHL shareholders had to approve:

Any board action that changed the employment status of Lupo and

certain other employees; the issuance of DHL shares or other

related securities; certain actions concerning debt or leases;

and changes in DHL’s auditors or accounting policy.   In addition,
                               - 85 -

certain key board decisions required supermajority approval,

including:   Amendments to the bylaws and articles of association;

entering into a new business other than one that was directly

related to the principal business of DHL; reappointment of the

CEO; certain debt or lease financing decisions; and matters that

exceeded a fair market value of $20 million, excluding the

exercise of the trademark option.       For these matters, the foreign

investors’ majority was not sufficient for control.

     Accordingly, the foreign investors did not have shareholding

control, and, as to many critical matters, their collective board

control was limited.   We must also weigh the fact that the

foreign investors did not have an agreement to collectively

control the board or to take any particular actions together.

     Considering the above, we hold that requisite control

existed for application of section 482 during the interim (1990

to 1992) period that concluded when the foreign investors

exercised their options and acquired additional shares.

     B. Effect of the Trademark Transfer After the Foreign
Investors Attained Their Collective Shareholding Majority of the
New DHLI/MNV Entity

     Petitioners argue that, even if the Court should find that

the requisite control existed during the interim period, the

trademark rights should not be subject to a section 482

allocation because the trademark rights were transferred about 1

month after the exercise of the foreign investors’ 45-percent

share option.   Petitioners contend that respondent may not
                               - 86 -

reorder the steps of the trademark transfer portion of the

transaction and conclude that it occurred before the foreign

investors actually gained control of DHLI/MNV or its successor.

     Respondent counters that the requisite control should be

measured or considered when the controlling persons or entities

are dealing with each other.   Under respondent’s approach, all

that is necessary is that the control exist when the parties

irrevocably bind themselves to a transaction.   Under this

approach, accordingly, even though the parties’ execution of the

agreement terms may occur when control no longer exists,

respondent would have section 482 authority to reallocate.

Respondent relies on Rooney v. United States, 305 F.2d 681, 683

(9th Cir. 1962), a case in which expenses incurred by a

liquidated corporation were allocated to a successor corporation

that had profited from transferred assets on which the expenses

were incurred.

     We agree with respondent and hold that it is appropriate to

use a transactional approach to a specific transaction that was

formulated at a time of requisite control and executed after the

requisite control no longer existed.    That is especially so here,

where the options for the foreign shareholders to gain control

and the transfer of the trademark rights to the new foreign

shareholder corporation were part of the same transactions, the

terms of which were preconceived, concurrent, and interdependent

and occurred within 1 month of each other.   A transactional
                                - 87 -

approach is appropriate where the substance of the entire

transaction so requires.7   See Arrowsmith v. Commissioner, 344

U.S. 6 (1952), and the discussion in Cayuga Service, Inc. v.

Commissioner, T.C. Memo. 1975-4.     To permit petitioners to avoid

appropriate section 482 reallocation merely because they changed

the order of the events in a single series of transactions would

unnecessarily exalt form over substance.

IV.   Ownership and Value of the DHL Trademark

      A.   Ownership

      Respondent determined that DHL sold the DHL trademark to

DHLI for less than its fair market value.    Petitioners argue that

DHL did not own the worldwide rights to the trademark, but that

it did own the rights in the United States.    Because of the

obvious effect the ownership question may have on the question of

value, we address the ownership question first.

      Ownership and value of the DHL trademark has been one of the

bones of contention between the parties.    Respondent’s

determination placed the value of the worldwide rights in the

$500/$600 million range for the 1990-92 transaction.    A $20


      7
        A transactional approach, however, may not be appropriate
where goods or services are independently contracted for after
the requisite control no longer exists. That should be the case
even if the form or substance of the transaction was dictated or
patterned after the approach used when requisite control existed.
In the context of these cases, it would not be appropriate to
approve reallocation of the cost of arm's-length services
performed after the 1992 transaction concluded, unless the
requisite sec. 482 control existed after 1992. Because of our
holdings on the post-1992 issue, we need not address the control
question for that period.
                               - 88 -

million price was ultimately used by the parties to the

transaction after $50 million had been considered and $100

million asked.   Petitioners’ and respondent’s pre- and post-trial

experts attempted to support all of these values and a myriad of

amounts falling in between.8

     One of the underlying disputes regarding the value of the

DHL trademark rights involves whether DHL owned the worldwide or

merely the U.S. rights.   Most of the documents and evidence show

or state that DHL owned all of the rights.     DHLI’s general

counsel, beginning in the mid to late 1980’s, however, maintained

that DHLI owned the rights to the trademark outside the United

States.   The parties here provided expertise supporting both

positions, and we have considered each.

     A trademark is a marketplace device by which consumers

identify goods and services and their source.     In the context of

trademark nomenclature, a trademark symbolizes “goodwill” or the

likelihood that consumers will make future purchases of the same

goods and services.   In a licensing arrangement, the goodwill

symbolized by the trademark is owned by the licensor, even though

created by the licensee’s efforts.      See, e.g., Cotton Ginny, Ltd.

v. Cotton Gin, Inc., 691 F. Supp. 1347 (S.D. Fla. 1988).



     8
        To some extent, it seems that the experts’ willingness to
support such disparate values is one of the reasons for the
escalation and protraction of the controversy in these cases.
Indeed, the difference between $20 million and $600 million may
be sufficient spoils to incite and inspire the meekest and least
confrontational amongst us.
                                - 89 -

     Trademark recognition develops from years of adver-
     tising, consistent packaging, promotional campaigns,
     customer service, and quality control. Depending on
     the strength of a trademark, the maintenance of the
     desired consumer awareness level generally requires
     significant, continuing advertising investment and
     product renovation. Trademarks lose substantial value
     without adequate investment, management, marketing,
     advertising, and sales organization.

Nestle Holdings, Inc. v. Commissioner, T.C. Memo. 1995-441, revd.

and remanded on other grounds 152 F.3d 83 (2d Cir. 1998).

     The validity of a trademark license is dependent upon the

licensor’s control over the nature and quality of goods and

services sold under the trademark by the licensee.9   The quality

control requirement has been codified in the Lanham Act,

15 U.S.C. secs. 1055, 1127 (1994), and is judicially recognized.

See Haymaker Sports, Inc. v. Turian, 581 F.2d 257, 261 (C.C.P.A.

1978); Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358,

366-367 (2d Cir. 1959).   A purported trademark license without

quality control can result in abandonment of the licensor’s

rights in the mark, a condition that has been also denominated “a

naked license”.   Stanfield v. Osborne Indus., Inc., 52 F.3d 867,

871 (10th Cir. 1995); see also 2 McCarthy, McCarthy on Trademarks

and Unfair Competition, sec. 18.48, at 18-75 to 18-76 (4th ed.

1997).   The parties’ experts all agree that quality control is

essential to a valid license.




     9
        See 2 McCarthy, McCarthy on Trademarks and Unfair
Competition, sec. 18:42, at 18-66 (4th ed. 1997).
                                 - 90 -

     Trademarks are territorial, and different ownership of the

same trademark is possible in different countries.10    In the

United States, trademarks may be created by use and protected by

registration.    Outside the United States, trademark rights may be

created by use and/or registration, and, in some instances,

registration is prima facie evidence of ownership.

     First, we briefly review the factual background for the

development and use of the trademark within the DHL worldwide

network.    The DHL worldwide network began with a single company

and, because of a competitor's complaints to the CAB, was divided

into essentially two operating entities--domestic (within the

United States) and international (outside the United States).

Although the shareholdings of the domestic and international

business entities appeared disparate, in actuality the entire

network was controlled by a group of shareholders, who ultimately

split up profits from the sale of a part of the network in accord

with their preconceived understanding that did not necessarily

comport with the ostensible shareholdings.

     The domestic and international operating entities were

relatively autonomous in their day-to-day operations but were

overseen and controlled by various groups and/or entities

controlled by the common controlling shareholders.     All of the

agreements, written or understood, reflect that DHL owned the DHL

name (trademark) and that DHLI was allowed to use it because of


     10
           4 McCarthy, supra sec. 29:7
                               - 91 -

DHL’s consent.   DHLI, however, caused registrations of the DHL

trademark in numerous countries in which the DHL network provided

services.   Those registrations were in the name of DHLI and/or

its related international entities and did not reflect that DHL

owned or licensed the trademark.    In addition, DHLI’s general

counsel contended, in spite of written agreements to the

contrary, that DHLI owned the trademark rights outside the United

States because of DHLI’s foreign registration of the trademark.

     With this somewhat generalized background, we consider the

positions of the parties and their experts on the question of

ownership of the DHL trademark.    Petitioners contend that DHL

owned the rights inside and DHLI owned them outside the United

States.   Respondent contends that DHL owned the worldwide rights

before the transaction with the foreign investors.

     Respondent makes a three-point argument in support of the

position that DHL owned the worldwide rights in the trademark.

First, respondent argues that, as a matter of trademark law, DHLI

was contractually cast as a licensee and that the requisite

control existed as between the licensor and licensee to maintain

and perfect DHL’s trademark ownership.    Second, respondent argues

that petitioners may not disavow the form they chose and that the

1974 MOA, subsequent amendments, and other documentation placed

ownership in DHL.   Finally, if we find that the requisites for

trademark ownership were not extant, respondent argues that the
                                - 92 -

contracts entered into by DHL and DHLI were still enforceable, as

between them.

     Petitioners take a different tack from respondent’s approach

by arguing that the arrangement between DHL and DHLI would not

meet the applicable section 482 regulations so as to require

reallocation as to that intangible asset.   Petitioners also argue

that, as a matter of law, trademark rights exist separately in

each country of registration and DHLI acquired the rights by

registration and use.    If we decide that DHL owned the worldwide

rights to the trademark, petitioners argue that they should be

allowed a setoff equal to the value of assistance or cost borne

by DHLI in developing the trademark rights outside the United

States.   The parties provided four well-qualified experts on

trademark law.

     Respondent’s expert on trademark ownership is a practicing

lawyer with 30 years’ experience, including litigation, in

intellectual property law, specializing in trademarks and unfair

competition.    He concluded that, with the possible exception of

certain Central American countries, the agreements between DHL

and DHLI established DHL as the owner of the trademark rights.

His interpretation of the 1974 MOA and related agreements is that

they give DHL the ownership in the trade name and trademark, in

particular because DHLI could not assign the foreign

registrations without DHL’s consent and because of DHLI’s

obligation to cease use everywhere for 5 years upon termination
                                - 93 -

of the DHL/DHLI relationship.   He also opined that DHLI was a

licensee of the trademark, and nothing in the trademark law

served to change that relationship between DHL and DHLI.

     Respondent’s expert’s conclusions are based, in part, on DHL

and DHLI’s agreement that New York law would govern the trademark

issue beginning in 1990 and that the 1974 MOA contained an

arbitration clause under the laws existing in the U.S. District

Court in the Territory of Guam.

     Petitioners offered three experts on the question of

trademark ownership, two professors, each with 30 years’

experience in this field, and a British solicitor who specializes

in trademarks in the United Kingdom and other countries.    Both

professors, when measuring the written agreements between DHL and

DHLI against the exacting standards of trademark law, concluded

that DHL owned the trademark rights within the United States and

DHLI owned the rights outside the United States.   The solicitor

concluded, by means of a six-issue analysis, that the trademark

was not “an indivisible global asset owned by DHL” and that a

decision of a court of the United States would not affect DHLI’s

rights in the existing registrations in foreign countries.

     The reports and testimony of the experts provided the Court

with helpful guidance in this technical and specialized area of

the law.   To some extent, we agree with each of the parties’

experts.   Petitioners’ experts defined the strict letter of the

law to perfect and maintain trademarks in the United States and
                                - 94 -

abroad.   Respondent’s expert, as a trial lawyer, advanced a more

practical formulation, reflecting what would have resulted if the

parties’ agreements and actions were contested and subjected to

litigation.

     The informality and lack of precise language used by DHL and

DHLI would have caused more problems in transactions between

unrelated third parties seeking to enforce their rights to the

DHL trademark.    But here we have corporate entities with

interlocking shareholder control and a common purpose of

establishing and maintaining a worldwide delivery network under

the name “DHL”.    DHL’s and DHLI’s respective rights and

obligations concerning the trademark are sufficiently defined to

be enforceable.    Both parties agree that DHL’s ownership of the

trademark in the United States is without question.

     DHL’s lack of involvement in the foreign registrations and

the lack of precise and more formal agreements and standards,

however, lessens the quality of DHL’s ownership rights and

interests in the registration and rights to the DHL trademark

outside the United States.    Because DHL had the ability to

terminate and/or cause DHLI’s inability to use the trademark for

a 5-year period, the import of DHLI’s foreign registrations is

mitigated.    Finally, in the factual context of these cases,

common shareholders controlled DHL and DHLI, and the foreign

investors had the option to acquire a collective majority

interest in DHLI/MNV and the DHL trademark worldwide.    Although
                               - 95 -

that fact should not have an effect on the stand-alone value of

the trademark, in the enforcement of ownership context, it has

the effect of neutralizing the foreign registrations in DHLI’s

name.   These weaknesses in the quality of DHL’s ownership of the

DHL trademark do not have the effect of making DHLI the

uncontested owner of the trademark rights outside the United

States, but would have a profound effect on a buyer’s willingness

to pay top dollar and the value of the DHL trademark worldwide.

     We hold that DHL owned and controlled the worldwide rights

to the DHL trademark, but that, as discussed above, the rights

outside the United States were subject to weaknesses and

questions that would affect the quality and value of DHL’s

interest.   Our conclusion and holding is also based on the

following analysis.

     After dividing the DHL network into domestic and foreign

operating entities, DHL and DHLI entered into the 1974 MOA which,

in part, concerned the DHL trademark.   The parties used the term

“license” to describe DHL’s agreement to allow DHLI to use the

name “DHL”.   Throughout subsequent amendments of the 1974 MOA,

that terminology was not contradicted or expressly modified.    For

most of the period under consideration, DHL had the ability to

terminate the arrangement, which would have contractually

prohibited DHLI from using the trademark for a period of 5 years.

In negotiating with investors interested in part or all of the

DHL network, DHL was represented as the owner of the DHL
                                - 96 -

trademark worldwide.   Although there was some doubt about the

quality of DHL’s ownership of the international rights to the

trademark, the parties to the transaction in question treated DHL

as the worldwide owner.   Only DHLI’s general counsel held the

view and expressed doubt about DHL’s ownership of the rights to

the trademark outside the United States.    There can be no doubt

here, however, that the shareholders and principals of DHL and

DHLI/MNV intended that DHL own the trademark and that DHLI’s

interest was that of a licensee.

     Petitioners attack the license terminology that they used to

cast the relationship between DHL and DHLI as to the trademark

and its use by arguing that the mere expression of the term

“license” does not establish and/or maintain a license

relationship.   They argue that, without quality control exercised

by the trademark owner (licensor) over the licensee, the

requisite control of the trademark use and services performed by

the licensee would not exist.

     However, respondent has shown by ample evidence in the

record that, as between DHL and DHLI, the requisite control did

exist.   The existence of that control is found in the unique

relationship of the corporate entities, their shareholders, and

the manner in which the business entities were operated,

coordinated, and presented to the public as a worldwide delivery

network with the name “DHL”.    Although the 1974 MOA and other

documents that defined the ownership, rights, and use of the
                                 - 97 -

trademark fall short of the strictest quality control standards

requisite for a textbook-quality license agreement that may be

required as between unrelated third parties, they are sufficient

and enforceable in the circumstances here.

     Petitioners make a collateral attack on the ownership issue.

They seek refuge in section 482 regulations in an attempt to show

that the form they chose should not be respected.     Petitioners’

argument focuses on the 1968 regulations11 and points out that

they do not contain mention of a license as a factor relevant to

which person or entity should be considered to have “developer”

status of intangible property.     See sec. 1.482-2(d)(1)(ii),

Income Tax Regs.   In essence, petitioners argue that legal

ownership should be disregarded for purposes of any section 482

reallocation of intangibles.

     Respondent argues that the facts here support a finding that

DHL is the developer or that the regulations in question provide

that, in the absence of a bona fide cost-sharing arrangement,

respondent may make allocations upon the transfer of intangible

property by the developer to a related entity.     Respondent



     11
        The parties refer to the regulations that were
promulgated in 1968 because the newer sec. 482 intangible
property regulations were adopted in 1994, and petitioners did
not elect, pursuant to sec. 1.482-1(j), Income Tax Regs. (1994),
to have them apply retroactively.
     Sec. 1.482-2(d), Income Tax Regs., was effectively
superseded by sec. 1.482-4T, Temporary Income Tax Regs., 58 Fed.
Reg. 5263, 5287 (Jan. 21, 1993), generally effective for taxable
years beginning after Apr. 21, 1993. The tax years in issue are
1990, 1991, and 1992.
                               - 98 -

further contends that there was no cost-sharing arrangement

between DHL and DHLI.   Finally, respondent contends that

petitioners failed to show that DHLI either developed or assisted

in developing the intangible (trademark) because it has not been

shown that the advertising expenditures incurred by DHLI were

more than what would have been incurred at arm’s length; i.e.,

allocation from DHL to DHLI is not appropriate.

     Petitioners counter that respondent may not choose either to

“invoke” the section 482 regulations and make an allocation based

on the developer/assister standard, or to ignore those

regulations and make an allocation “pursuant to” the parties’

licensor/licensee relationship.   Petitioners rely on the language

of section 1.482-2(d)(1)(ii)(a), Income Tax Regs., that “no

allocation * * * shall be made” with respect to a transfer of

intangible property unless either (1) there is a “bona fide cost

sharing arrangement” as defined in section 1.482-2(d)(4), Income

Tax Regs., or (2) the intangible has been transferred by the

“developer” within the meaning of section 1.482-2(d)(1)(ii)(c),

Income Tax Regs.   Petitioners contend that respondent has denied

the existence of a bona fide cost-sharing arrangement in these

cases and that, therefore, any section 482 allocation must be

based on the developer/assister standard.   Finally, petitioners

contend that respondent, under the regulations, may make an

allocation (reduction of value) for an “assistance” provided by

DHLI if DHLI is not considered the “developer” of the intangible.
                               - 99 -

     The referenced regulations are clearly not intended for the

purpose of deciding the ownership of an intangible.   Instead,

they are designed to assist in allocation.   In that regard,

petitioners argue that the referenced regulations ignore

ownership in the process of allocating an arm’s-length price.    In

answering the question of whether the ownership of the DHL

trademark was bifurcated between DHL and DHLI, we do not look to

the section 482 regulations cited by petitioners.   Although those

regulations may have some effect on our allocation decision, they

are not relevant in deciding the ownership of the trademark

rights as a predicate for valuing the trademark.

     Petitioners contend that they sold only the U.S. trademark

rights.   Because we have decided the ownership question, we will

consider whether and to what extent the section 482 regulations

may have an effect on allocation of the value.

     B.   Value of the DHL Trademark

     As previously noted, the value of the worldwide right to the

DHL trademark as determined by respondent in the deficiency

notices is almost $600 million greater than the value advocated

by petitioners.   In that regard, we note that such extreme

differences “demonstrate the caution that is necessary in

weighing expert valuations that zealously attempt ‘to infuse a

talismanic precision into an issue which should frankly be

recognized as inherently imprecise’ (Messing v. Commissioner, 48
                               - 100 -

T.C. 502, 512 (1967))”.   Estate of Hall v. Commissioner, 92 T.C.

312, 338 (1989).

     On brief, petitioners argue that the $20 million price

agreed to by the parties to the transaction was at arm’s length

because of the differing and adverse interests as between the

controlling shareholders and the foreign investors.     Petitioners

also contend that the 1989 negotiations established “a $50

million ceiling value” for the DHL trademark worldwide.    The main

thrust of petitioners’ argument on value is that tangible and

intangible components (other than the trademark) of the DHL air

express network and the ability to efficiently deliver are worth

more to customers than the DHL name, and, therefore, the network

was “far more valuable” than the trademark.

     Respondent, on the other hand, contends that an analysis of

the values used by the parties to the transaction will reflect

that the intangibles, primarily the trademark, were valued by the

foreign investors at almost $300 million12 and that amount

comports with respondent’s experts’ proffered values.    As an

alternative, respondent argues that value resides in DHL’s

retention of the right to use the DHL trademark in the United




     12
        Respondent’s determination alternatively valued the
trademark in 1990 and 1992. The 1992 valuation produced the
higher amount approximating $600 million and the 1990 valuation
was closer to $500 million. Respondent’s litigating position,
which is based on the 1990 date, approximates a $300 million
value for the trademark.
                                 - 101 -

States for a period of years as additional noncash consideration,

citing Alstores Realty Corp. v. Commissioner, 46 T.C. 363 (1966).

     Respondent’s notice determination was based on alternative

valuation dates in 1990 and 1992.          The use of two possible dates

is likely due to confusion over when the DHL trademark should be

valued.   The confusion probably arose because the transaction and

prices to be paid were agreed to during 1990 and the actual sale

or exchange occurred in 1992.     We have no question about the fact

that the taxable event occurred in 1992, and any additional

capital gain from petitioner’s sale of its interest in the DHL

trademark would be includable in the 1992 taxable year.13         On

brief, respondent advances only the 1990 valuations of his

experts, and petitioners do not argue that 1992 would be the more

appropriate year for valuation.      Petitioners, on brief, argue

that any capital gains adjustment attributable to the sale of the

trademark should be recognized in 1992.         It therefore appears

undisputed that any such adjustment should be recognized in 1992,

but valued as of the time the right to acquire was created (1990)

for purposes of section 482.14




     13
        On brief, both parties advocated 1992 as the year of any
recognition of income from the trademark sale.
     14
        Petitioners also argued that the sale of the trademark
occurred after the foreign investors gained collective control of
the international entity so that sec. 482 should not apply for
lack of the requisite control. We have already addressed that
question and resolved it adversely to petitioners.
                                   - 102 -

     Trademarks, trade names, brand names, and other similar

items are treated as intangible property and are covered by

section 1.482-2(d),Income Tax Regs. (1968), which deals with the

transfer or use of intangible property.          Section 1.482-

2(d)(2)(ii), Income Tax Regs., provides the general rule that, in

determining “the amount of an arm’s length consideration, the

standard to be applied is the amount that would have been paid by

an unrelated party for the same intangible property under the

same circumstances.”       The regulation goes on to enumerate the

following factors that may be considered in arriving at the

amount of the arm’s-length consideration:

          (a) The prevailing rates in the same industry or
     for similar property,

          (b) The offers of competing transferors or the bids of
     competing transferees,

          (c) The terms of the transfer, including limitations on
     the geographic area covered and the exclusive or
     nonexclusive character of any rights granted,

          (d) The uniqueness of the property and the period for
     which it is likely to remain unique,

          (e) The degree and duration of protection afforded to
     the property under the laws of the relevant countries,

          (f) Value of services rendered by the transferor to the
     transferee in connection with the transfer within the
     meaning of paragraph (b)(8) of this section,

          (g) Prospective profits to be realized or costs to be
     saved by the transferee through its use or subsequent
     transfer of the property,

          (h) The capital investment and starting up expenses
     required of the transferee,

              *        *       *     *       *      *     *
                               - 103 -


          (j) The availability of substitutes for the property
     transferred,

          (k) The arm's length rates and prices paid by unrelated
     parties where the property is resold or sublicensed to such
     parties,

          (l) The costs incurred by the transferor in developing
     the property, and

          (m) Any other fact or circumstance which unrelated
     parties would have been likely to consider in determining
     the amount of an arm's length consideration for the
     property.

Sec. 1.482-2(d)(2)(iii), Income Tax Regs.

     “‘[F]air market value is the price at which the property

would change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or to sell and both

having reasonable knowledge of relevant facts.’”    United

States v. Cartwright, 411 U.S. 546, 551 (1973) (quoting section

20.2031-1(b), Estate Tax Regs.).    In addition to proving that the

deficiencies set forth in the notices of deficiency are

arbitrary, capricious, or unreasonable, the taxpayer has the

burden of proving satisfaction of the arm’s-length standard.    See

Sundstrand Corp. v. Commissioner, 96 T.C. at 354.

     Two expert witnesses with backgrounds in business, finance,

or economics testified in support of respondent’s trademark

valuation position.   Both experts used an income methodology to

value the trademark or the rights to use (royalties).   One used

the relief-from-royalty approach and the other used the relief-

from-royalty approach coupled with another income methodology to
                                  - 104 -

arrive at opinions of value.      One of respondent’s expert’s

reports reflects worldwide values for the DHL trademark of $287

million and $409 million as of the 1990 and 1992 valuation dates,

respectively.15   He also opined that DHL’s right to use the

trademark for 15 years beginning 1992 had a 1992 value of $58

million and that DHLI’s use of the trademark for 1982 through

1992 had a value of $83,129,000.

     Respondent’s other expert opined that the DHL trademark had

worldwide values of $327.5 million and $489.6 million as of the

1990 and 1992 valuation dates, respectively.16     He also opined

that DHLI’s use of the DHL trademark for 1984 through 1992 had a

value of $57.095 million, and DHL's 15-year use of the trademark,

beginning in 1992, had a $46.4 million value as of 1992.     He

calculated DHLI’s revenues attributable to DHLI’s use of the DHL

trademark, as follows:




     15
        This expert offered by respondent ascribed separate
trademark values to the U.S. and non-U.S. rights as follows:

                      1990                       1992
U.S.              $93 million               $102 million
Non-U.S.          194 million                307 million
Worldwide         287 million                409 million

     16
        Respondent's other expert assigned separate trademark
values to the U.S. and non-U.S. rights as follows:

                      1990                       1992
U.S.              $89.3 million             $122.2 million
Non-U.S.          238.2 million              367.4 million
Worldwide         327.5 million              489.6 million
                              - 105 -

                  1984        $367,841,000
                  1985         431,929,000
                  1986         534,283,000
                  1987         687,427,000
                  1988         832,879,000
                  1989         974,050,000
                  1990       1,146,312,000
                  1991       1,404.800,000
                  1992       1,725,850,000

The expert’s computations imply that the income earned is from

the trademark and not from other intangibles or assets.    We do

not agree that these income figures show only the value of the

trademark, but they do reflect that DHLI’s revenues were

generally increasing and substantial.   There is no question that

the DHL name had some role in DHL’s, DHLI’s, and the DHL

network’s success.

     Petitioners proffered one valuation expert, an economist,

who used the relief-from-royalty income approach to value the

trademark and two additional economists who opined on whether

valuable intangibles existed in the context of the DHL network.

One of petitioners’ experts concluded that DHLI had valuable

intangible assets including a cost advantage from its volume and

its reputation for reliable performance and that it was those

attributes and not the DHL name that had value to DHLI.    Another

of petitioners’ experts, using a different methodology, similarly

opined that it was the DHLI infrastructure that made the

difference and that DHL did not possess an intangible (including

the trademark) that caused DHLI’s success.   Finally, petitioners’

valuation expert opined that the DHL trademark had $55.2 million
                                  - 106 -

and $70.2 million worldwide values on the 1990 and 1992 valuation

dates, respectively.17

     Respondent attempts to corroborate the experts’ 1990

valuations of $287 million and $327.5 million by contending that

the 1990-92 transactional figures would support a $300 million

value for the intangibles (in respondent’s view attributable to

the trademark).    Respondent points out that DHLI/MNV’s combined

shareholder equity at the end of 1998 netted out at $202 million

(positive $226 for DHLI and negative $24 for MNV).     Considering

that the foreign investors paid $287.5 million for a 57.5-percent

shareholding interest of DHLI/MNV ($500 million times 57.5

percent), it follows that they were also “acquiring” 57.5 percent

of the net shareholder equity or $116.15 million ($202 million

times 57.5 percent).     Therefore, respondent contends, the foreign

investors paid $171.35 million ($287.5 million less $116.15

million) for the “off-balance sheet assets”.     Finally, if the

57.5 percent of the intangibles equaled $171.35 million, then 100

percent equaled approximately $300 million ($171.35 divided by

57.5 percent equals $298 million).




     17
        Petitioners’ valuation expert estimated separate
trademark values of the U.S. and non-U.S. rights as follows:

                       1990                      1992
U.S.              $24.2 million             $18.2 million
Non-U.S.           31.0 million              52.0 million
Worldwide          55.2 million              70.2 million
                               - 107 -

     Respondent also argues that the $500 million value of

DHLI/MNV implied by the foreign investors’ 57.5 percent/$287.5

million price is short of the actual value because it does not

include a control premium.   Respondent points out that although

the three foreign investors acquired a 57.5-percent interest in

concert, none of them held a majority interest, and the DHL

shareholders, either individually or collectively, did not hold a

majority interest.   Accordingly, if control had been purchased

the price would have been higher, thereby supporting an amount in

excess of $300 million for the intangibles.

     Petitioners argue, and we agree, that respondent’s control

premium position has no place in determining the value of the

assets individually.   More particularly, a control premium has

been held to reflect the value of the shareholder’s right to

determine corporate policy, “over and above the value that is

attributable to the corporation’s underlying assets using

traditional valuation methodologies.”    Philip Morris Inc. v.

Commissioner, 96 T.C. 606, 628 (1991).

     As to respondent’s position that the transactional figures

could support a $300 million value for the intangibles,

petitioners’ rebuttal is that the transaction was arms length.

In other words, petitioners contend that the foreign investors,

on the basis of advice and information from their advisers,

independently came up with a $450 million price for the stock and

a $50 million price for the trademark.   Respondent disagrees and
                                - 108 -

contends that neither the $50 million nor the $20 million was

arrived at either at arm’s length or on a fair market value

basis.

       Respondent, in support of that position, makes the following

points:    (1) When the $20 million price was negotiated and

established during 1989 and 1990, DHL and DHLI were owned and

controlled by the same interests within the meaning of section

482.    (2) The first price set, $50 million, did not represent an

objective or fair market valuation of the trademark but instead

represented the amount of capital the foreign investors wished to

inject into DHL because of its fragile financial condition.    (3)

The foreign investors and DHL shareholders each had tax

considerations, which to some extent were motivating factors for

numerous proposals during the negotiations, the setting of

prices, and the proposed movement of assets in the transaction.

(4) Petitioners’ lawyers orchestrated the price reduction from

$50 million to $20 million for the trademark, by recommending the

removal of favorable provisions, including DHL’s ability to

terminate on 90 days’ notice and by encumbering the trademark

with “two reverse royalty-free 15-year licenses running to the

seller and buyer”.    (5) The foreign investors went along with

these approaches so long as their concerns were addressed; i.e.,

among others, that $50 million of capital be infused into DHL.

       We are convinced that there was a certain acquiescence on

both sides of this transaction that was motivated by the desire
                               - 109 -

to close the deal and save taxes.        We are cognizant that the

foreign investors did not buy an entire business entity.

Instead, the foreign investors, in accord with their goal of

gaining access to the international portion of the DHL network,

entered into a symbiotic relationship with the DHL shareholders

and, in essence, became the collective majority “partners” in the

international portion of the network.        To insure that any

problems with DHL (financial or otherwise) did not deprive them

of their acquired access to the international portion of the DHL

network, the foreign investors sought to remove the DHL trademark

from DHL and to include it in the entities in which they

collectively had a 57.5-percent shareholding.

     In that same setting, the DHL shareholders collectively had

a 42.5-percent interest in the international portion of the

network and, ultimately, the DHL trademark.        In essence, the DHL

shareholders sold only a portion of the international business.

The transaction here was not in the normal mold of the willing

buyer who purchases a single asset or business to do with as he

wishes.   Here, the parties were attempting to build an operating

consensus, and each attempted to build in the safeguards and

elements that would achieve its goals and protect its acquired or

remaining combined investments or interests.        The existing

shareholders and foreign investors were attempting to formulate

and participate in a corporate pool of rights and assets.          As

such, the foreign investors purchased collectively fractional
                                - 110 -

ownership in DHLI.   In that regard, they only acquired, in

theory, a fractional interest in the trademark.       These

circumstances permitted a certain amount of flexibility and

subjectivity in setting prices and arranging terms.

     Accordingly, we agree with respondent that neither the $50

million nor $20 million price for the DHL trademark was set at

arm’s length or represented a fair market value, as those terms

have been defined.   Fair market value is based on a willing buyer

and seller.    United States v. Cartwright,      411 U.S. at 551.   More

importantly, the willing buyer is a purely hypothetical person or

entity, and the personal characteristics of the parties to the

transaction are not taken into account in the valuation.        Estate

of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990); see also

Estate of Mueller v. Commissioner, T.C. Memo. 1992-284.

     We now proceed, based on the record, to decide the fair

market value of the DHL trademark worldwide.       After deciding the

value, we shall decide whether any adjustments to the value are

appropriate.   We agree with respondent’s litmus test approach

reflecting that the grossed-up price paid by the foreign

investors reflects value in excess of the shareholder equity

shown in the books of DHLI and MNV.       Petitioners’ experts also

agreed that value in excess of book values existed, but concluded

that the value did not reside in the trademark.       To some extent,

we agree with both parties’ experts.       Somewhere in between their

positions lies the correct answer.        Neither the trademark nor the
                                 - 111 -

other intangibles represent the entire amount of any excess over

the shareholders’ equity.

     The evidence supports a finding that the know-how and system

in place that facilitated the ability to make timely and

efficient deliveries is at least as important as the name “DHL”.

The parties’ experts attempted to use professional and

“scientific”-appearing techniques to compute and reach their

conclusions; they exercised substantial latitude in selecting the

variables that control the outcome.        There is no exactitude to

their theories or methodology.     In each instance, their results

appeared to depend on variables, the estimate of which seemed to

favor the party they “represented”.

     Petitioners rely on examples of companies that sought to

purchase infrastructure and placed no emphasis/value on the

trademark of the target company.      In that regard, one particular

potential buyer of DHL entities or assets was not interested in

acquiring the DHL name and intended to phase it out over

approximately 1 to 3 years.   That, however, does not mean that

the DHL name had no value.    In that context, the potential buyer

already had a name (United Parcel Service or UPS) that was better

known domestically, and possibly internationally, than DHL.        Its

focus was access to the international document and package

delivery market by the acquisition of the DHLI network

infrastructure and ability to deliver.
                                - 112 -

     The above-referenced potential buyer did not intend to use

its own name initially.   Obviously, the DHL name recognition, at

least during a phase-in period, was necessary for purposes of

continuity of customer patronage and was quite valuable in that

respect.   Once the also well-recognized name was transitionally

introduced over time, the customer base could be maintained to

the extent possible.   To a buyer without name recognition,

however, the “DHL” name would have greater value because of the

buyer’s complete lack of customer recognition and the cost of

enhancing or developing a new name and/or image.    It is the value

to such a willing buyer that we must consider.     Obviously, if a

buyer already has a more valuable trademark with better public

acceptance, that would not be a comparable, interested, or

willing buyer.

     To a great extent, the parties experts’ (especially

petitioners’) support our factual findings that the

infrastructure, in the context of these cases, is at least as

important as the name.    Of course, petitioners’ experts’ opinions

minimized the role of the name and emphasized the role of the

infrastructure or the ability to deliver the service.

Conversely, the effect of respondent’s experts’ reports was to

minimize or ignore the importance of the infrastructure or the

ability to deliver the service.

     With respect to the parties’ experts whose opinions placed a

value on the trademark, they all relied on a relief-from-royalty
                                - 113 -

analysis to reach their conclusions.      We were not surprised that,

using the same methodology, they reached results on opposite ends

of the spectrum and that the results each reached favored the

party that paid his fees.18   The difference in the values

advocated lies in the differing assumptions and variable factors

used by each expert in his analysis.      Respondent’s experts

premised their choices of rates and factors on beliefs that the

DHL name had high marketplace recognition for quality and had

become an important factor in the success of the DHL network and

constituted a desirable and valuable asset.

     One of respondent’s experts began his computation by

conducting a discounted cash-flow analysis to determine whether



     18
        Cf. Nestle Holdings, Inc. v. Commissioner, 152 F.3d 83
(2d Cir. 1998), revg. and remanding T.C. Memo. 1995-441. That
case involved the valuation of trademarks and trade names, and
the court described the relief-from-royalty method as follows:
     Underlying this methodology is the view that the only
     value a purchaser of a mark receives is relief from
     paying a royalty for its use. Using this model, the
     fair market value of a trademark is derived by
     calculating the net present value of the stream of
     royalty payments from which the purchaser of a mark is
     relieved. This stream is calculated by (i) determining
     if the trademarks are profitable, or capable of being
     licensed, (ii) picking a royalty rate for each
     trademark, and (iii) multiplying this rate by the
     estimated revenue stream of the product associated with
     the mark. * * *

Id. at 87-88. After describing the relief-from-royalty
methodology, the Court of Appeals expressed disagreement with its
use in arriving at a trademark’s fair market value because, in
the court’s view, it understates trademark value. Any appeal
from our decision in these cases would be to the Court of Appeals
for the Ninth Circuit.
                               - 114 -

sufficient cash-flow existed to warrant allocation of income to

the trademark.   He used financial information and projections

that came from petitioners and their advisers, some of which were

adjusted from yearend to the valuation date on July 9, 1990.

Then, he made adjustments for taxes, using a 30-percent rate

worldwide and adjustments for capital expenditures (5 percent of

revenues) and depreciation and amortization (3 percent of

revenues).   Finally, networking capital additions were projected

at 10 percent of incremental revenues in each projection year.

He then proceeded to determine the fair market value of the DHL

network as the sum of the present values of the available cash-

flows in the projection period plus the present value of cash-

flows expected beyond the projection period at a 6-percent growth

rate.   Finally, he capitalized the “residual period cash flow”

using a 12.5-percent discount rate.      That computation resulted in

a 1990 total asset value of all DHL companies of $1.2 billion,

equity of $630 million, and an amount that was attributed to

intangible assets of $520 million.

     There is no question that the DHL network was successful and

that it had value over and above the shareholder equity.

Although certain of respondent’s expert’s assumptions were

generous and resulted in the inflation of value, overall we can

accept that there was a reasonably large amount of value in

excess of the equity reflected in the network entities.     The more
                                - 115 -

critical question is to which intangible the excess is

attributable.

     Next, using a relief-from-royalty methodology, respondent’s

expert opines that $287 million should be attributed to the DHL

trademark for 1990.    He surveyed a wide range of businesses and

found a broad range of royalties for trademark use of .7 to 10

percent.   He settled on a 1-percent royalty rate and also assumed

a 30-percent income tax rate and 6-percent growth rate.    A 12.5-

percent discount rate was applied in order to reach his result.

     Respondent’s other expert, after discussing several methods,

chose an income approach he called “other anticipated value

approach”, in which he quantified the value of increased benefits

in conjunction with the relief-from-royalty method (discounted

cash-flow model).   He described the “other anticipated value

approach” as one that quantifies economic benefits accruing to an

asset that may not be reflected in other income approaches,

including marketing cost savings, operating synergies, lower

costs of funds, etc.   This benefit is supposedly measured in the

form of incremental cash-flows that the expert believes are “not

necessarily the result of excess earnings or avoided royalties.”

He then proceeded to explain that the quantification occurs by a

cash-flow analysis reduced to a present value by means of a

discounted cash-flow technique.     Finally, it was pointed out that

the “other anticipated value approach” is used in conjunction
                                - 116 -

with one or more other income methodologies, in these cases the

relief-from-royalty approach.

     Our analysis of this expert’s approach reveals little

difference in methodology or approach from that used by

respondent’s expert who relied solely on the relief-from-royalty

approach.   The distinctions that made a difference between the

first expert’s $287 million value and this expert’s $327.5

million value for 1990, for the most part, are attributable to a

somewhat different choice of assumptions.        To reach $327.5

million, this expert used a 3.6-percent long-term growth rate, a

30-percent tax rate, a 12.21-percent discount rate, and a 1.15-

percent royalty rate.

     Petitioners’ valuation expert, as a premise for his

valuation, accepted as a fact or used as a base “(1) licenses

actually granted by * * * [DHL] and DHLI; and (2) the arm’s-

length negotiation that resulted in an established royalty in

* * * [the parties’ agreements].”         So, for example, he accepted

the .75 percent royalty rate that was to begin in 2007 after the

end of the 15-year royalty-free period.        He also accepted as fact

or a basis for his valuation that DHL and DHLI had never required

a royalty in their relationship.     Because we have already found

that these transactions were not necessarily in all respects at

arm’s length, petitioners’ expert’s approach is flawed in its

premises.
                               - 117 -

     Petitioners’ expert valued the DHL trademark using separate

assumptions for the domestic and foreign portions of its value.

Using a .31-percent royalty rate (based on a     14.1-percent

discount rate to the .75 percent rate agreed to by the parties

beginning in 2007), future revenue estimates, a 7.6-percent

growth rate, and a 14.1-percent weighted average cost of capital

and/or discount rate, he concluded that the U.S. trademark rights

had a maximum value of $24.2 million.     Using a .31-percent

royalty rate, future revenue estimates, and a 13.4-percent

discount rate, he concluded that the non-U.S. trademark rights

had a maximum value of $31 million.      As noted above, that results

in a worldwide value of $55.2 million for the DHL trademark.

     Thus, each of the trademark valuation experts has used

assumptions, rates, and factors that were useful in reaching the

grossly disparate amounts to “assist” the Court as a fact finder

in these cases.   In particular, however, we feel that

respondent’s experts have used more reasonable rates and factors,

and their assumptions and approach are not as flawed as

petitioners’ expert’s because of his acceptance that the

transaction was at arm’s length.    We find it peculiar that

petitioners’ expert could expect to derive an independent fair

market value by accepting the parties’ values and rates, because

his objective was to reach a fair market value.     However,

petitioners’ expert accepted rates used in the transaction under

consideration and then reduced their effect by discounting them
                                - 118 -

to a present value.   That approach does not serve to assist the

Court in measuring whether the parties were at arm’s length

and/or whether the value they used was a “fair market value”.

Petitioners’ expert’s approach to valuation begs the question and

is fatally flawed.

     We are not constrained to follow the opinion of any expert

when the opinion is contrary to our own judgment.        We may adopt

or reject expert testimony, whichever in our judgment is most

appropriate.   Helvering v. National Grocery Co., 304 U.S. 282,

295 (1938); Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir.

1976), affg. T.C. Memo. 1974-285.         We are not limited to choosing

the opinion of one expert over another but may extract relevant

findings from each in reaching our own conclusions.         Chiu v.

Commissioner, 84 T.C. 722, 734 (1985).

     Although respondent’s experts’ approaches were more

reasonable in terms of the rates used, we do not agree that the

value they have determined can be isolated as being attributable

to the trademark.    In reaching that conclusion, we have, to some

extent, relied on petitioners’ experts, who opined that the DHL

network has value, over and above the stated equity, that should

be attributable to intangibles other than the trademark.        In

particular, we find persuasive the concept that the DHL network

enjoyed an intangible benefit from its existing infrastructure

and operating know-how that created a “barrier to entry” of

others into the same marketplace.         That principle was borne out
                                - 119 -

when DHL attempted to expand its domestic market share and, to

some extent, was unable to compete with the established market

leaders which had operating cost-effective infrastructures in

place.    That same phenomenon occurred when a successful leader in

the domestic delivery market attempted to break into the European

market.   In that instance, it was the DHL network in place in

foreign countries that, to some extent, limited the competitor’s

market entry success.   Finally, in some circumstances it has been

shown that the trademark or name is of lesser value to a firm

with an established trademark or name that wishes expansion and,

ultimately, needs only the infrastructure and know-how to be

successful.   Accordingly, we are convinced that intangibles,

other than the trademark, account for some portion of the income

benefits that have been estimated by the parties’ experts.

     In the same manner as we have disagreed with respondent’s

experts’ opinions that all the value of intangibles should be

attributed to the trademark, we likewise disagree that all or

substantially all of the excess or intangible value should be

attributed to nontrademark intangibles.   The answer lies

somewhere in between.   Some of the factors we have considered

include the fact that the $50 million amount set by the foreign

investors in their initial offer was not based on value but

instead was intended to bolster DHL’s financial condition so as

to maintain it as a viable part of the DHL network.   The

reduction from $50 to $20 million was not based on the objective
                               - 120 -

reality of trademark value but was more motivated by business and

tax planning considerations between parties.   Those parties were

attempting to negotiate a result or solution where the existing

shareholders would receive some return on or redemption of their

capital holdings, and the foreign (or new) investors wished to

find a synergetic enhancement of their existing international

airline and freight capabilities.

     The fact that the DHL shareholders may have countered with a

$100 million offer in this setting may reflect the value placed

on the trademark asset by its owners but is again tempered by the

type of relationship that was being formulated and the needs of

the parties.   Essentially, the DHL shareholders, after failing to

strike a deal with a prior potential merger partner, were more

motivated or determined to find a partner to resolve the

financial and marketplace problems they confronted.   After

extensive negotiations with the foreign investors, the DHL

shareholders were confined to a fixed maximum sale price that the

foreign investors steadfastly refused to move from on several

occasions.   The foreign investors’ rigidity on price eventually

resulted in a cessation of negotiations and discussions.

Ultimately, the parties were willing to vary prices of individual

assets (e.g., reduction of the trademark price from $50 to $20

million) without changing the total price of the transaction.    In

that environment, it is less certain that the offers and
                                - 121 -

counteroffers represented, as to each individual asset, a “fair

market value.”

     The parties’ experts have placed us in an environment where

it is more difficult to precisely value the trademark within the

universe of intangibles that may account for the income benefits

enjoyed by the DHL network and other attributes that may affect

the value of the trademark.    We must, however, decide the value

of the trademark as a stand-alone asset and accordingly segregate

its value from those of other intangibles.    Petitioners have

steadfastly held to their primary position that the trademark had

a $20 million value and, at most, there is a $50 million ceiling

on value.    They maintain that the transaction was at arm’s length

and/or that the involvement of the foreign investors caused an

environment where the agreed-to prices represent fair market

value.    We have concluded that petitioners’ premise cannot be

sustained.    Petitioners have also allowed the question of whether

Bain’s $20 million “comfort letter” was for the worldwide rights

and other related matters to remain murky.    For example,

petitioners’ experts have attempted to show that intangibles

other than the trademark were responsible for DHLI’s success in

the marketplace.    Those “other intangibles”, however, have not

been clearly defined, and no specific value(s) were assigned to

them.    Respondent has not provided any assistance regarding any

intangible other than the trademark and takes a position

diametrically opposed to petitioners’.
                               - 122 -

     We have been convinced that, to some extent, the success of

the DHL worldwide network is attributable to name recognition

and, to some extent, to cost, know-how, and other benefits

attributable to the operating infrastructure in place.      The

parties have left us with a blunt tool with which to cleave the

trademark from the other intangibles.      The extreme differences in

the parties’ experts’ results and variables have not helped to

fine-tune our thinking.   We accept respondent’s approach to

measuring the intangibles and conclude that the value of all the

unbooked intangibles is $300 million.      On the basis of our best

judgment and after considering the record and opinions of all

experts, we conclude that the worldwide rights to the trademark

had a $150 million value as of 1990, without considering any

impairment to the quality of DHL’s ownership.

     Our valuation considerations, however, do not end here

because DHL’s ownership of the worldwide trademark is subject to

imperfections and open to question.      We must consider those

imperfections and factor them into the value that a willing buyer

would pay.   It is axiomatic that a willing buyer would not pay

full value to a seller whose ownership of the asset is, in any

manner, questionable.   Although we have found that, as between

DHL and DHLI, the license agreement was sufficient to place

worldwide ownership in DHL, as a legal and technical matter,

there may be problems in asserting DHL’s rights to the trademark

in more than 100 foreign countries where the trademark has been
                               - 123 -

registered in DHLI/MNV’s names without reference to DHL.      To a

potential buyer, imperfections in DHL’s trademark ownership

(e.g., the foreign registrations) present potential legal

problems and possible controversy, delay, and litigation expense.

There is no question that these circumstances would have a

profound and substantial effect on value.

     We also recognize that the international portion of the DHL

network was more successful than the U.S. portion, and, on the

basis of the financial data presented and other indications in

the record, we would conclude that about two-thirds of the value

of the trademark was sourced in its value outside the United

States.   With a $150 million worldwide value, we find that $100

million was attributable to the portion of the network outside

the United States.

     Here again, the parties have failed to provide guidance with

respect to the effect of DHL’s ownership imperfections on the

value of the trademark.   The parties argued that DHL either did

or did not own the worldwide rights to the trademark.      The

parties’ reasons for their positions caused our holding that DHL

owned the worldwide rights, but that the ownership was, in some

ways, imperfect.   The all-or-nothing approach of the parties does

not adequately address any discount that may be appropriate to

account for the ownership defects.       An imperfect title or cloud

on ownership would result in a marketability discount.
                               - 124 -

     A marketability discount is generally thought to be

necessary where the buyer may incur out-of-pocket expenses or

other costs due to some aspect or defect in the asset being

purchased.   For example, in an arm’s-length transaction involving

unlisted stock, there would be a significant discount reflecting

the out-of-pocket expenses or other costs to prepare a security

for public sale or to compensate the buyer of an unmarketable

security for its lack of liquidity.       See Estate of Hall v.

Commissioner, 92 T.C. 312 (1989).        Any cloud on title or

ownership of property, “no matter how slight, will have a

negative effect on the value of the property.”        Adams v.

Commissioner, T.C. Memo. 1985-268.        In Adams, the fair market

value of a bombsight was decided to be $75,000 and was discounted

by $10,000 (13.33 percent) for what appears to be a minimal cloud

on the taxpayer’s title.   In certain cases involving the value of

shares of stock where there was question about the legal effect

of certain terms or attributes of the stock, the stock value was

discounted to, in part, reflect the legal questions and the

potential for litigation and costs attendant thereto.       See Estate

of Newhouse v. Commissioner, 94 T.C. at 230-233; Estate of

Reynolds v. Commissioner, 55 T.C. 172, 193-195 (1970).

     With respect to the DHL trademark outside the United States,

although as between DHL and DHLI, the ownership was in DHL, the

trademark had been registered in some 195 countries in DHLI’s,

MNV’s, or their subsidiaries’ or agents’ names without mention of
                                - 125 -

DHL’s interest.   A buyer could be financially burdened with

perfecting its right to those registrations in some or all of the

195 countries.    The potential for delay, expense, inconvenience,

etc. could be immense and would present a huge potential for out-

of-pocket expenses or other costs to a potential willing buyer.

     To adequately reflect those legal problems and potential

costs, a 50-percent marketability discount is appropriate.

Because the international portion of the DHL network produces

about two-thirds of the business and/or profit, $100 million of

the $150 million fair market value of the DHL trademark can

reasonably be attributed to that portion.   Applying a 50-percent

marketability discount to the $100 million foreign portion

results in a discounted value for the DHL trademark of $100

million worldwide, and we so hold.

     1.   Effect of Section 482 Regulations on Allocation of
Value

     Next, we consider the parties’ collateral arguments

concerning the amounts allocable under section 482 and underlying

regulations.   Petitioners rely on a portion of the regulations

that provide that when one member of a controlled group transfers

intangible property to another member of the group, the district

director may make “appropriate allocations to reflect an arm’s

length consideration for such property or its use.”   Sec. 1.482-

2(d)(1)(i), Income Tax Regs.   More specifically, petitioners

argue that the district director may not make such an allocation

unless or until the “developer” of the intangible property has
                                 - 126 -

transferred it to another member of the controlled group.

Petitioners rely on the following language in the regulation:

             In the absence of a bona fide cost-sharing
        arrangement (as defined in * * * [sec. 1.482-2(d)(4)]),
        where one member of a group of related entities
        undertakes the development of intangible property as a
        developer within the meaning of * * * [sec. 1.482-
        2(d)(1)(ii)(c)], no allocation with respect to such
        development activity shall be made * * * until such
        time as any property developed, or any interest
        therein, is or is deemed to be transferred, sold,
        assigned, loaned, or otherwise made available in any
        manner by the developer to a related entity in a
        transfer subject to the rules of this paragraph.

Sec. 1.482-2(d)(1)(ii)(a), Income Tax Regs.

        Petitioners contend that the application of this regulation

requires the determination of what intangible property was

developed, which entity was the developer within the meaning of

section 1.482-2(d)(1)(ii)(c), Income Tax Regs., and whether the

developer transferred the intangible property to a related

entity.     Petitioners argue that DHLI was the “developer” of the

DHL trademark outside of the United States and, accordingly, that

portion should not be allocated or reallocated to petitioners.

Petitioners note that the application of these regulations is not

dependent upon ownership.

     Respondent argues that petitioners’ proposed application of

the so-called Developer-Assister Regulation is factually and

procedurally incorrect in these cases.     Respondent contends that

the facts here show that DHL was the developer of the trademark

and that there was no cost-sharing agreement between DHL and

DHLI.     Respondent points out that DHL licensed the trademark to
                                 - 127 -

DHLI under the 1974 MOA and subsequent amendments and that

petitioners have failed to show that any expenditures incurred by

DHLI were more than would have been incurred at arm’s length

under those circumstances so as to trigger the need for an

allocation under the regulations.

     Our review of the regulations and some of the examples cited

therein lead us to the conclusion that petitioners’

interpretation does not work when applied to the facts in our

record.   First, there was no specific cost-sharing agreement with

respect to development, enhancement, or maintenance of the DHL

trademark.   Petitioners have presented evidence that, over a

period of years, DHLI spent substantially more on advertising

than DHL.    We have no way of measuring those expenditures’ effect

on the value of the trademark.     That is especially so where

petitioners’ experts, in contradiction to petitioners’ argument

on this point, opined that the trademark has limited value and

that the excess value of DHLI that may be indicated is

attributable to intangibles other than the trademark.     Having

found a value higher than what petitioners argue was the limit,

petitioners argue that DHLI is the developer of the non-U.S.

portion and is responsible for the value we have found.

Petitioners then contend that respondent should have reduced any

adjustment to DHL based on an arm’s-length or fair market value

by the amount attributable to DHLI in developing or assisting in

developing the non-U.S. trademark.
                                - 128 -

     Overall, petitioners have not carried their burden of

showing the requisite fact pattern for the relief they

seek--reallocation/reduction for the international portion of the

trademark value.    To some extent, our reduction of the trademark

value from $150 million to $100 million accounts for DHLI’s

efforts in registering and perfecting the trademark rights.

     The related parties’ relationship regarding the use of the

DHL trademark was not a textbook example of a licensing

agreement, but it was sufficient to bind these related parties

and to effectuate control over the use of the trademark.    There

was no agreement or evidence of an agreement to permit DHLI’s

separate development of the DHL trademark other than as a

licensee.    DHL employees and/or officers did not agree, with

limited exceptions, to DHLI’s use or registration of the

trademark in its own name.    Petitioners argue that the subject

regulations are not concerned with ownership, but, in the same

context, also argue that a trademark may be owned by different

interests and separately owned in different countries.    We have

already addressed this question in considering the trademark

ownership.

     Next, petitioners rely on language in section 1.482-

2(d)(1)(ii)(c), Income Tax Regs., which provides guidance as to

some of the factors to be considered in determining which member

of a group of related entities is a developer, as follows:

     Of all the facts and circumstances to be taken into
     account in making this determination, greatest weight
                               - 129 -

     shall be given to the relative amounts of all the
     direct and indirect costs of development and the
     corresponding risks of development borne by the various
     members of the group * * *. * * * Other factors that
     may be relevant in determining which member of the
     group is the developer include the location of the
     development activity, the capabilities of the various
     members to carry on the project independently, and the
     degree of control over the project exercised by the
     various members.

     In this regard, petitioners argue that DHLI bore the costs

and risks of registering, protecting, and promoting the trademark

outside the United States.   Respondent counters that petitioners

cannot isolate the registration of the trademark outside the

United States as making DHLI the developer.   Respondent explains

that DHLI is a licensee, and there has been no showing that the

costs incurred for registration and/or enhancement of the

trademark were more than a licensee would have expended at arm’s

length.   In addition, respondent points out that the DHL network,

at least in the customer’s or the public eye, was a single

network and that, therefore, any enhancement was not readily

segregable for purposes of allocation.   Respondent also questions

which of the DHLI/MNV entities bore the cost of advertising or

marketing the trademark outside the United States.    In that

connection, it was the international operating subsidiaries, and

perhaps agents, that bore those costs in their respective

countries, and they were mostly MNV subsidiaries.    Finally, we

cannot ignore the paradox of petitioners’ argument.    How can it

be that DHLI spent hundreds of millions of dollars developing

(advertising) the DHL trademark outside the United States, but
                               - 130 -

the parties to the transaction reached an “arm’s-length” value of

$20 million?

     We find, on this record, that DHL established the trademark

and is the developer within the meaning of the regulations.    Even

if DHLI had, to some extent, assisted in developing the

trademark, petitioners have not shown that DHLI expended any more

than an arm’s-length amount in connection with a licensee’s use,

development, enhancement, or maintenance of the trademark.    More

significantly, the DHL network is a related group of entities

that pursued the expansion of the network in concert.

Petitioners have attempted to mix the registration and

advertising costs.   The mere filing of the registrations does not

make DHLI the developer of the trademark.   Moreover, the

advertising, both within and without the United States, was

promoting or marketing DHL’s worldwide network.   Customers in any

country were intended to understand that their item could be

delivered anywhere in the world, including the United States,

Europe, the Far East, etc.   Accordingly, advertising in one part

of the world easily could have generated responsive business from

the destination location.

     Finally, we have not been provided with the means to

evaluate the effect of the advertising on the value of the DHL

trademark.   In order to attribute or limit any or all of DHLI’s

and/or MNV’s advertising costs solely to the value of the DHL

trademark outside the United States, petitioners would have to
                               - 131 -

show that the effect of the advertising was so limited.

Petitioners have not shown that or that DHLI bore more of the

cost than an arm’s-length licensee would have borne.19

     Petitioners bear the burden of showing that existence of an

arm’s-length price (value) or the absence of it in this instance

and have failed to do so.   See Sundstrand Corp. v. Commissioner,

96 T.C. at 354.   Accordingly, we hold that upon the sale of the

trademark by petitioners to DHLI/MNV and/or its successor(s) no

setoff or reduction of the $100 million value is warranted under

section 1.482-2(d)(1)(ii), Income Tax Regs.

     2.   Respondent's Alternative Argument--the Alstores Doctrine

     Our last consideration regarding the trademark valuation

involves respondent’s alternative argument.   Respondent contends

that DHL’s right to use the trademark after the sale represented

additional consideration received by DHL on the sale.    This

concept derives from Alstores Realty Corp. v. Commissioner, 46


     19
        Petitioners also made the argument that even if DHLI was
not considered to be the developer, the sec. 482 regulations
would permit respondent to allocate or set off the portion of
assistance DHLI provided toward the value of the intangible. We
note that respondent has not attempted such an allocation or
setoff, and it does not appear that respondent may be compelled
to do so. Even if such an allocation or setoff were appropriate,
as we have already explained, petitioners have not provided a
means by which such an allocation or setoff could be rationally
determined.
     Petitioners have chosen to be bound by the less detailed and
inclusive 1968 version of the sec. 482 regulations that apply to
intangibles, but they used examples from the revised version to
support their argument on these points. We suspect that
petitioners’ resort to latter-day regulations was motivated by
the examples provided under the 1968 regulations which we found
did not fit the factual pattern presented in this record.
                                 - 132 -

T.C. 363 (1966), and the companion case of Steinway & Sons v.

Commissioner, 46 T.C. 375 (1966), and, hence, has been referred

to as the “Alstores doctrine”.     The Alstores case involved real

property that had been offered for sale for $1 million and was

eventually sold for $750,000 with a rent-free leaseback to the

seller.    The Court held that the rent-free lease constituted

additional consideration for the real property.    The Alstores

case involves a factual conclusion that additional consideration

was received in the form of a rent-free lease.

      Subsequent cases have made similar factual holdings.   One

such case involved a trademark and addressed the question of

whether the transfer of the trademark was a sale or a license;

i.e., whether the seller retained sufficient control or ownership

over the trademark to render the interest sold a license rather

than ownership.    See Leisure Dynamics, Inc. v. Commissioner, 494

F.2d 1340 (8th Cir. 1974), revg. and remanding T.C. Memo. 1973-

36.   Here, respondent contends that petitioners sold the entire

interest in the DHL trademark and retained no ownership interest,

so that the 15-year royalty-free use by DHL was a license back

that represented additional consideration.

      Petitioners make several arguments in response to

respondent’s position.    These arguments can be summarized as

follows:    (1) The form of the transaction reflects that DHL

“reserved” the 15-year rights to use the DHL trademark in the

United States; (2) section 1253(a) superseded the Alstores
                               - 133 -

doctrine as it relates to a trademark; and (3) the Alstores

doctrine does not apply in the factual setting of these cases.

We agree that the Alstores doctrine does not apply in the factual

setting of these cases.

     We have undertaken a complete analysis of the trademark

value in these cases.   We have decided that DHL owned the

worldwide rights to the DHL trademark sold the worldwide rights,

and that a section 482 adjustment should be made to DHL’s 1992

income to reflect the adjusted fair market value of the

trademark.   Unlike the Alstores case, here the total value of the

trademark has been considered, and the factual predicate for

additional value does not exist.    In Alstores, the Court, to some

extent, filled the gap between the $1 million asking price and

the negotiated $750,000 price with the value of the rent-free use

retained by the seller.   No such gap in value exists here.

Accordingly, we hold that there was no compensation in addition

to the value we have decided for the trademark.

V. Allocation of DHLI Income to DHL From Imputed Royalties,
Imbalance, Transfer, and Network Fees for the Period 1974 Through
1992

     A. Background

     In addition to making allocations regarding the selling

price of the DHL trademark, respondent also made adjustments

allocating DHLI income to DHL attributable to royalties for use
                               - 134 -

of the DHL trademark for 1982 through 1992,20 and for fees from

DHLI to DHL for delivery services in the United States and for

imbalances and transfers.   Finally, respondent determined that

DHL should share in some of DHLI’s income, which was determined

in connection with DHLI’s network fees.       As between DHL and DHLI,

no royalties were charged for use of the DHL trademark, and,

until 1987, no charge was made for the imbalance and transfer

services.   Beginning in 1987, a cost plus 2 percent fee was to be

charged to the party with the excess of shipments to the other

and for DHL’s transfers of DHLI’s shipments through the United

States.   Respondent contends that the 2-percent fee was

inadequate to fully compensate DHL.

     The proposed royalties and the transfer and imbalance items

are necessarily interrelated and to some extent inversely

proportionate.   The royalty rate must be tied to the value or

income capacity of the trademark.        The fees for services for use

of another company’s infrastructure and ability to efficiently

deliver packages is related to the physical facilities and the

intangibles we have described as existing infrastructure and

operating know-how.   We have been convinced that the trademark

and the other intangibles are equally important in terms of the

DHL network’s income potential.    Accordingly, within the context

of all intangibles, to the extent that the royalties are less


     20
        Royalties for years prior to 1990 are relevant because
they affect the computation of net operating losses carried into
the taxable years before the Court.
                                - 135 -

important or valuable, the value of the infrastructure and

operating know-how are more valuable.21

     B. Royalties

     DHLI did not pay DHL royalties before the 1990-92

transaction.    After the transaction and transfer of the

trademark, no royalty was to be charged to DHL for the first 15

years and a .75 percent royalty was to be paid beginning 2007.

One of respondent’s experts, Keith Reams (Reams), applied a 1-

percent royalty to the DHLI and MNV courier revenues to reach the

following royalty revenue amounts:

               1982           $2,399,000
               1983            3,020,000
               1984            3,940,000
               1985            4,421,000
               1986            4,938,000
               1987            6,196,000
               1988            8,195,000
               1989           10,003,000
               1990           11,920,000
               1991           15,607,000
               1992           12,490,000

Respondent’s other expert applied a .75-percent royalty to the

combined revenue of DHLI and MNV reduced by revenue from another

entity, and, for the years 1991 and 1992, the imbalance fees from

DHL to reach the following royalty revenue amounts:




     21
        Because of the complex interaction of these concepts,
the relationship cannot be completely proportionate. We only
emphasize that there is some correlation between them.
                              - 136 -

            1984            $2,759,000
            1985             3,239,000
            1986             4,007,000
            1987             5,156,000
            1988             6,247,000
            1989             7,305,000
            1990             8,597,000
            1991            10,536,000
            1992             9,249,000

     Petitioners argue, first, that no royalty was due from DHLI

because it was the “developer” and, second, if we should find

that DHL was the developer and/or owner of the trademark, no

royalty would be due under an arm’s-length standard.22

Petitioners contend that this is so because of reciprocal

benefits to both DHL and DHLI under the mutual agency agreement.

Petitioners rely on a regulation that indicates that a cash


     22
        Petitioners did not offer an expert who proposed a
royalty rate for use of the DHL trademark. Petitioners’ experts
concluded that the trademark had little or no value and that,
accordingly, no royalties are warranted. Another of petitioners’
experts, in reaching a value for the trademark, used the parties’
.75-percent rate (to begin in 2007) discounted to an amount that
he believed would apply in 1990. The discounting was a present
value approach. Although a present value approach has been held
appropriate to reflect the time value of money, no meaningful
reason was advanced for discounting a royalty rate for the
passage of time. The value of a trademark or the amount of a
royalty does not automatically increase or decrease with the
passage of time.
     Finally, one of petitioners’ experts, an economist, provided
his opinion of all respondent's statutory notice sec. 482
adjustments, including the trademark value, royalties, imbalance
fees, transfer fees, etc. His critique of respondent’s
determinations was based on the information available to
respondent at the time the notice was issued and not on the
substantial amount of information that was exchanged by the
parties after the issuance of the notice. This expert’s report
had some relevance to the question of whether respondent’s
notices of deficiency were arbitrary or capricious but is out of
sync with the evidence the Court must evaluate on the basis of
the record.
                                - 137 -

royalty is not the only arm’s-length consideration for the use of

intangible property; the transfer or use of other reciprocal

rights can also represent fair market value.      That regulation,

sec. 1.482-2(d)(2), Income Tax Regs. (1968), contains the

following:

     To the extent appropriate, an arm’s length
     consideration may take any one or more of the following
     forms: (a) royalties based on the transferee’s output,
     sales, profits, or any other measure; (b) lump-sum
     payments; or (c) any other form, including reciprocal
     licensing rights, which might reasonably have been
     adopted by unrelated parties under the circumstances,
     provided that the parties can establish that such form
     was adopted pursuant to an arrangement which in fact
     existed between them. * * *

     Petitioners also make two other arguments against

respondent’s royalty determination.       First, they argue that even

though DHLI had contracted with independent agents in several

countries for delivery service, those agents were allowed to use

the DHL name without payment of a royalty.      Petitioners also

cited a few other examples of royalty-free use of a name.

Second, petitioners argue that a royalty payment from DHLI to DHL

does not make economic sense.    In that regard, petitioners

contend that DHL received a benefit in the form of DHLI’s

development of an international network into which DHL could make

shipments.

     Respondent counters, first, that DHLI was not the owner

and/or developer of the trademark, and we have so held.      With

respect to petitioners’ other two arguments, respondent contends

that petitioners did not produce credible, specific, or
                               - 138 -

appropriate comparables.   First, respondent suggests that no

royalties were charged for the agents’ use because it would have

been subject to tax withholding in the agents’ countries.

Although respondent’s suggestion appears to be a matter of

speculation, the record does reflect that within the DHL

worldwide network, the approach was to net out fees and to avoid

charges between related and unrelated entities involved in the

network.   Finally, respondent points out that petitioners’

argument that DHL obtains other reciprocal benefits ignores the

fact that DHLI received the same benefits from DHL.

     Respondent’s experts surveyed a wide range of businesses and

found a broad range of royalties for trademark use from a low of

.7 to a high of 15 percent.   Respondent’s experts settled on .75-

and 1-percent rates, although the average and median rates would

have been much higher.   This gravitation to a lower percentage

reflects both experts’ recognition that a fair royalty would be a

relatively low percentage in the setting of these cases.23




     23
        We found some interesting paradoxes in comparing the
parties and their experts with those in another case involving
trademarks and arm’s-length royalty issues. Nestle Holdings,
Inc. v. Commissioner, T.C. Memo. 1995-441. In that case, the
taxpayer was arguing for higher royalty rates, and the
Commissioner was arguing for lower royalty rates. The parties
and, to some extent, the experts’ reports in Nestle made very
similar arguments to those made by the parties in these cases,
except the arguments were made by the opposite parties. For
example, the taxpayer argued against zero royalties. These
paradoxes have no probative value in the cases now before the
Court but only serve to further illustrate the “malleability” of
the parties and their experts.
                               - 139 -

     The applicable standard for determining an arm’s-length

royalty is the amount that would have been paid by an unrelated

party for the same intangible property or its use under the same

circumstances.   Sec. 1.482-2(d)(2)(ii), Income Tax Regs.   Under

that same regulation, the best indicator would be transfers by

the same transferor to unrelated parties involving the same or

similar intangible property under the same or similar

circumstances.   If a sufficiently similar transaction involving

an unrelated party is not available, the arm’s-length amount is

determined under the facts and circumstances test of section

1.482-2(d)(2)(iii), Income Tax Regs.

     Petitioners offered examples of independent agents who were

a part of the DHL network.   Those agents were allowed to use the

DHL name without payment or with a nominal payment (if local law

required some payment) regarding the use of the DHL name.

Respondent contends that the arrangement with the agents is not

comparable because DHLI did not charge the agents a royalty in

order to avoid the agents’ countries’ withholding tax.    Whether

respondent’s contentions are correct or not, petitioners have not

shown that the circumstances with DHLI and certain agents were

sufficiently similar transactions and whether the agents were

sufficiently “unrelated” parties so as to be used as the

preemptive means of setting an arm’s-length standard.    All

petitioners have done is show that no royalties were charged

within the DHL network.   That does not mean that no royalty
                               - 140 -

should have been charged.   That does not show that zero is an

arm’s-length royalty for purposes of these cases.   No similar

transaction occurred outside the DHL network.

     After reviewing the facts and circumstances and the experts’

reports, we agree with respondent that a royalty would have been

charged as between unrelated or arm’s-length parties.   As to

petitioners’ argument that DHL received some benefit other than

cash, such benefits have not been quantified and/or shown to be

within the range of arm’s-length royalties.   In that regard, it

is petitioners’ burden to show the royalty amounts and that they

are arm’s length, which they have failed to do.

     The ability to deliver has value, and the recognized name

that customers will seek out for delivery service also has value.

The DHL name, as we have already found, has value, and its use

likewise has value.   It is our understanding, however, that the

DHL name was not the only factor for the financial success

enjoyed by the DHL network.   In a like manner to our discount of

the trademark value, we hold that a .75 percent royalty rate

would be appropriate in the circumstances of these cases.    We

agree with respondent’s experts’ use of a royalty at the lower

end of the range and find the .75 percent amount is more

appropriate.   Additionally, it is the rate used by the parties

after the foreign investors collectively had a majority

stockholding in the international portion of the DHL network.     It
                                - 141 -

is also the rate used by one of respondent’s experts and by

petitioners’ expert, albeit in a discounted form.

     Respondent relied on the expertise of Keith Reams, who used

a 1-percent rate to arrive at the royalties listed above.        We

approve Reams’ approach, with the exception that the royalty rate

should be reduced to .75 percent.

     C. Imbalance and Transfer Fees

     Beginning in 1974, DHL performed delivery services in the

United States for DHLI.    The services took the form of the

delivery of inbound items and the transfer of items passing

through the United States from one foreign jurisdiction to

another.    Similarly, DHLI performed delivery (but no transfer)

services for DHL in DHLI’s international jurisdictions.        Until

1987, no reimbursement (of any kind) was made to either entity.

In 1987, procedures were implemented that provided that the party

with excess outbound shipments to be delivered in the other’s

jurisdiction would pay a cost-plus-2-percent payment to the party

that handled the excess shipments.        For 1987 through 1990, DHL

handled DHLI’s shipments that were in excess of DHL’s outbound

shipments (to be delivered outside the United States).        Similar

provisions were made for payment for transfer items, which

occurred only in connection with the movement of items through

the United States, and so payments were to be made only by DHLI

to DHL.    Respondent does not question DHL’s and DHLI’s 1987

agreement or their methodology, but argues that imbalance
                               - 142 -

payments should have been made for years prior to 1987 for excess

shipments (imbalance) and for transfer items handled by DHL for

DHLI.   As to the 1987 year and later, respondent contends that

the 2-percent markup was not at arm’s length and was inadequate

to compensate DHL or DHLI.

     Petitioners again argue that the arrangement between DHL and

DHLI was commercially reasonable and within a range that would

have resulted from arm’s-length negotiations between unrelated

parties.   Petitioners argue that the approach used was comparable

to the express mail arrangements between the U.S. Postal Service

and other national postal administrations during the 1970’s or

about the same time as the reciprocity began between DHL and

DHLI.   Petitioners also cited one such arrangement between

unrelated entities.

     Respondent argues from a stronger position because of the

1987 implementation of a cost-plus arrangement for the excess or

imbalance.   Petitioners try to explain this away by contending

that the circumstances extant at that time should not determine

what was commercially reasonable in earlier periods.   Petitioners

also point out that DHL did not maintain detailed cost

information before 1987.

     The parties proffered expertise to the Court on these

matters.   Petitioners offered an economist who analyzed the

imbalance and transfer fees between DHL and DHLI and an economist

specializing in the economics of regulated industries, including
                                 - 143 -

the U.S. Postal Service, who examined the reasonableness of the

imbalance fees from the perspective of the postal community.

Respondent proffered an economist to opine on an arm’s-length

markup percentage for imbalance and transfer services between DHL

and DHLI and to determine the imbalance and transfer costs and

fees for years prior to 1987.

     First we consider the report of petitioners’ expert, who

used the practices of the postal community to analyze the

reasonableness of the imbalance fees.      Petitioners point out that

their practice of no fees for imbalance and transfers was based

on the postal system approach.     Their expert explains that,

initially, postal systems of the world accepted the premise that

mail flows between two given countries essentially in balance;

i.e., it is expected that each outgoing letter will engender an

incoming reply.   Consequently, there was a form of reciprocity.

At some point, the postal community determined that the incoming-

outgoing balance assumption was no longer valid.     That

recognition occurred in 1969 and evolved through 1989.

Petitioners’ expert states that DHL and DHLI recognized the need

to change in the mid-1980’s and was able to implement it only as

of 1987.   As of 1969, however, a convention among postal systems

established a weight-based fixed or level rate of 50 centimes per

kilogram of excess mail received, with a SwF2,000 threshold.24



     24
        It appears that the monetary units used for the
convention are Swiss francs.
                               - 144 -

As time progressed, the convention was modified for inflation and

to take into account varying and more specific information and

fees.

     Respondent agrees with the postal system analogy and does

not question DHL and DHLI’s methodology, but contends that the

postal community recognized that its basic assumption was no

longer valid in 1969, whereas petitioners essentially ignored the

imbalance until they were forced to change their imbalance or

transfer practices.   Respondent contends that DHL and DHLI

changed their practices in 1987 only after those practices were

brought into question by a regulatory agency and/or an

administrative law judge.

     We agree with respondent on this point--it was reasonable

for petitioners to fashion their imbalance and transfer approach

after that used in the postal community, but that does not

explain why it was appropriate to wait until 1987 to address the

imbalance.   In addition, we cannot accept petitioners’ argument

that it would have been difficult to quantify any imbalance or

transfers because of the manner in which their records were kept.

There is no doubt that petitioners would have found some

reasonable way (as respondent’s expert did) to determine the

imbalance or transfer costs if they were dealing with an

unrelated third party with whom a reciprocal agreement existed.

Accordingly, we proceed to decide the arm’s-length percentage

compensation that would have been charged by independent parties.
                               - 145 -

     Petitioners’ other expert, an economist, analyzed the

transfer price between DHL and DHLI.     Although DHL and DHLI

applied their cost-plus 1987 approach for imbalances and

transfers on a per-shipment basis times a weighted average

delivery cost and percentage markup, petitioners’ expert analyzed

the cost for all reciprocal shipments and arrived at a different

result from DHL and DHLI and from respondent’s approach.     By

estimating a substantial cost differential between DHLI and DHL

(larger for DHLI), petitioners’ expert concluded that any

adjustment for the imbalance, whether computed at cost plus 2, 4,

or 15 percent markup, would result in a substantial adjustment in

DHLI’s favor for all years under consideration.

     Respondent’s expert used or accepted the same methodology as

DHL and DHLI had used to compute the imbalance, but he used a 4-

percent as opposed to the 2-percent markup that was used by DHL

and DHLI.   Respondent’s expert concluded that there should be an

imbalance adjustment for pre-1987 years and an increase in DHL’s

and DHLI’s adjustment for the years where a 2-percent markup was

used.   Because respondent’s expert used the same approach or

methodology called for in the agreements between DHL and DHLI, we

consider his report first, and then we will contrast and consider

petitioners’ expert’s approach.

     Although the taxable years before the Court are 1990, 1991,

and 1992, respondent is able to determine section 482

adjustments to earlier years because of the existence of net
                               - 146 -

operating losses carried from the 1970’s and 1980’s that

petitioners have claimed in the years before the Court.

Accordingly, respondent seeks the allocation of imbalance and

transfer costs and 4-percent markups25 for the years 1979 through

1986 and increases in the markup rates for imbalance and transfer

computations from 2 to 4 percent for 1987 through 1992.     It

should be noted that the imbalance for 1991 and 1992 resulted in

a payment from DHL to DHLI.   In that regard, respondent contends

that the 4-percent rate should apply to that payment and an

allocation made favoring petitioners.     Respondent’s pre-1987

proposed adjustments are larger because they include the cost and

the markup, whereas the 1988 through 1992 adjustments cover only

an increase in the markup percentage.26

     Respondent’s expert, an economist, by using information

reported by DHL, including financial statements and annual



     25
        Respondent used a 15-percent markup in the statutory
notice determination.
     26
        The adjustment for the years 1987 and forward where DHL
and DHLI used a cost plus 2 percent markup are relatively small
in that they usually represent the difference between the 2 and
4-percent markups. For example, the adjustment computed by
respondent’s expert (which represents respondent’s trial position
and represents a reduced markup percentage from 15 down to 4) for
the 1988 tax year is $277,000 for the imbalance and transfers.
That is so because respondent does not question the parties’
approach and computation of the base (costs) to which the markup
percentage is applied. In contrast, for years prior to 1987, DHL
and DHLI did not address the imbalance, and the cost factor was
not paid on the imbalance. This difference accounts for
relatively larger combined adjustments for the imbalance and
transfers ranging from $1.075 million for 1979 up to $12.480
million for 1986.
                                - 147 -

budgets, was able to find the number of outbound shipments for

the years 1983 through 1990 and the inbound shipments for 1987

forward.   For 1983 through 1986, he assumed that inbound

shipments grew at the same rate as outbound shipments.      For 1979

through 1982, no data were available, and he assumed that

outbound and inbound shipments grew at the same rate as courier

revenues, which were available.     The imbalances were calculated

as the difference between inbound and outbound shipments.

Finally, average cost per shipment was available from 1987

through 1990 and reflects a downward trend from $11.64 in 1987 to

$9.99 in 1990.   Information also showed that the cost per

transfer shipment also fell from $5.05 in 1987 to $3.75 in 1989

and went up to $3.97 in 1990.    He therefore assumed that airline

transportation costs were trending down and had been higher

during the period 1979 through 1986.      To be conservative, he

averaged the known imbalance and transfer costs to arrive at

$10.96 and $4.38 as the amounts to be used for imbalance and

transfer costs, respectively, for the 1979 through 1986 period.

     Respondent’s expert next used a comparable company approach

to determine a markup of 4 percent on cost for imbalance and

transfer shipments.   The five companies selected were clearly in

the same business, and their net sales less operating expenses

were used to determine an operating profit, which was divided by

operating expenses to reach a markup percentage on costs.      The

comparable period used was 1990 through 1992, and it produced
                                - 148 -

average markups ranging from a negative 6 percent to a positive

5.2 percent.    The median percentage was 4 percent, the amount

used for all years by respondent’s expert.

     Petitioners do not dispute the information that respondent’s

expert derived directly from financial and business records but

disagree with his estimation and extrapolation process to

approximate or estimate the imbalance that existed in years for

which no specific records were maintained by petitioners.    In

particular, petitioners contend that growth in outbound shipment

volumes cannot be determined by means of the growth rate in

annual revenues.    Petitioners indicate that the relationship

between DHL’s growth rates should not be used to gauge inbound

shipment growth, which relates to DHLI’s business.    This

approach, petitioners argue, does not accurately estimate actual

results.    Petitioners also point out that respondent’s expert was

selective in his use of projection material in that he used 1987

data to project 1979 through 1983 figure estimates, rather than

the more contemporaneous information that was available from 1984

through 1986.    Although the criticisms made by petitioners are

numerous, petitioners have not offered a more accurate method of

estimating the actual imbalances that existed during the years in

question.   Respondent’s expert attempted reasonably to compute
                               - 149 -

the imbalance and used accepted methodology, which petitioners

have criticized but not shown to be incorrect or unreasonable.27

     Petitioners also criticize respondent’s expert’s comparable

approach in reaching a 4-percent markup based on comparable

companies.   They point out that the removal of one of the five

comparables (Federal Express) drops the weighted average from 4

percent to 1.55 percent.   Although petitioners are mathematically

correct, they do not address the fact that Federal Express

represents, by far, the largest share of the domestic market in

which petitioners were engaged.    Petitioners also complain that

respondent’s expert’s comparables are taken from 1990 through

1992 information and should not be extrapolated back to years

1979 through 1988.   Here, again, petitioners complain, but do not

provide more timely or appropriate comparables.   Respondent’s

expert has made adequate and uncontroverted explanations for his

assumptions on this aspect.

     As explained above, petitioners’ approach to respondent’s

position on the imbalance adjustments is that petitioners’

expert’s total cost analysis would result in an imbalance

requiring payment to DHLI in all years.   If the Court decides

that a section 482 adjustment for imbalance fees is warranted,



     27
        Petitioners’ expert did not directly address
respondent’s expert’s approach but focused on a total cost
approach, as opposed to an imbalance approach, that he projected
would reflect that the “imbalance” actually favored DHLI during
the years in question. We address petitioners’ expert’s report
later in this opinion.
                                - 150 -

then petitioners argue that DHLI would be entitled to an setoff

for its greater cost factor.    The proposed setoffs would more

than obviate the adjustments respondent advances in this

litigation.   Accordingly, we next consider petitioners’ expert’s

report on this subject.

     Petitioners’ expert begins by an analysis of the arrangement

between DHL and DHLI for imbalance and transfer shipments.    He

concludes that their arrangement (cost-plus as opposed to a

fixed-fee or flat-rate) is in accord with the postal system model

and “is consistent with arm’s length practice in the context of

the overall, complex contractual relationship between DHLI and

* * * [DHL].”   He then states, without explanation, that if the

Court determines that DHLI and DHL are commonly controlled, then

they should each receive from the other the costs incurred for

delivering all documents and/or packages for the other, plus a

normal return on those costs.    That, however, is not the

agreement between the parties or the approach used in the postal

system model.   The agreement of DHL and DHLI was to compensate

only the party who delivered the excess number of shipments at a

weighted average delivery cost of the person performing the

service.   The weighted portion of the agreed formula is dependent

on the types of items delivered; i.e., documents or

packages/parcels.   A higher cost is usually attributed to the

packages/parcels.
                               - 151 -

     Petitioners’ expert opined that DHLI delivery costs are

greater than DHL’s because of the higher airport costs,

complication of delivery in foreign countries, and the greater

distances.   He concludes that the difference in delivery costs is

so great that, without considering the excess shipments or

imbalance, DHL should owe DHLI.    The magnitude of the expert’s

approach is illustrated by the difference in a single year.     For

the 1990 year, under DHL and DHLI’s agreement, DHL handled more

shipments for DHLI than the reverse, and DHLI owed about $10.1

million, including the weighted cost and a 2-percent markup.

Under petitioners’ expert’s approach, DHL would owe DHLI about

$32.3 million, a difference of over $42 million or four times the

amount agreed to by DHL and DHLI for a single year.

     We cannot accept the premise or reasoning advanced by

petitioners’ expert for a “gross up” of the parties’ reciprocal

costs as representing an arm’s-length relationship.    Petitioners’

expert seems to be contending that his approach is appropriate

for controlled corporations, but he has not explained why it is

representative of an arm’s-length approach.    Additionally,

respondent has not questioned the cost approach used by

petitioners for the imbalance, only the markup rate that was

used.

     The record here does not support petitioners’ expert’s

supposition.   The parties to the agreement did not intend or

expect that one party or the other would always suffer the
                                - 152 -

imbalance.    As we understand the premise for the approach

actually used, it contains the assumption that the imbalance

would vary as between the parties as it did between the 1990 and

1991 years.    From reviewing the facts of these cases and some of

the experts’ reports, it is our understanding that independent

(arm’s length) parties who enter into reciprocal exchanges of

services do so because of perceived benefits each gains from use

of the other’s facilities.    One possible reason for such a

reciprocal agreement is to expand service available for customers

and potential customers without the capital infrastructure costs

that would otherwise be incurred.         Although one party’s costs may

be greater or less than the other’s, that is not the basis for

the reciprocity.    Ultimately, a reciprocal agreement envisions

that compensation occur when one of the parties performs more

services for the other than are received.        That is the case here,

and petitioners’ expert, although accepting that the approach of

DHL and DHLI was at arm’s length, devised an approach that

ignored the parties’ understanding.

     In addition to the theory and substance deficiencies in

petitioners’ expert's report, respondent points out the following

flaws:   (1) Many of the numbers for 1989 and 1990 are not

supported in the record, and no analysis was provided as to how

they were calculated; (2) the position is taken that petitioners’

expert’s estimated numbers were more reliable than DHLI’s actual

numbers, even though a large portion of DHLI’s financial
                                - 153 -

information does not exist in this record; (3) the expert used

1991 and 1992 cost figures for DHLI which are different from

those used by the parties and contained in the record; (4) the

expert used a 15-percent markup (same as used in the notices of

deficiency but different from the 4 percent advanced by

respondent for purposes of litigation and 2 percent used by the

parties) without analysis of comparable companies to determine

what an appropriate markup should be, and respondent also points

out that petitioners argued that the 15-percent markup used for

the notice determinations was arbitrary and capricious; and (5)

the expert’s use of package or document weight is unjustified and

does not comport with the parties’ agreement that uses a weighted

cost that accounts for the difference in costs between packages

and documents, and therefore no further adjustment is necessary

to the imbalance cost.

     The record and most of the expertise provided by the parties

support DHL’s and DHLI’s 1987 approach to the imbalance and

transfers as one that is arm’s length, and we so hold.

Petitioners did not provide any other reciprocal arrangements

with unrelated parties that were under the same or similar

circumstances as those advanced by their expert.      See sec. 1.482-

2(d)(2)(ii), Income Tax Regs.    Accordingly, we used a facts and

circumstances approach to deciding an arm’s-length markup.      Sec.

1.482-2(d)(2)(iii), Income Tax Regs.      Regarding the failure to

account or pay for imbalances or transfers before 1987, we hold
                               - 154 -

that arm’s-length and/or independent parties would have paid for

imbalances and transfers for all years as proposed by

respondent’s expert, beginning with 1979.   We find that

respondent’s expert’s estimates of the costs are, in part,

supported in the record, and, in part, based on reasonable

assumptions.   More importantly, petitioners, who bear the burden

of showing an arm’s-length rate and the amount of any services

performed by or between the controlled entities, have failed to

do so in the context of these cases.28

     Concerning the 4-percent markup estimated by respondent’s

expert and advocated by respondent, we hold that rate to be more


     28
        Petitioners complained at trial and on brief that they
should not be put in the position of rebutting or addressing the
opinions of respondent’s experts and that they should be required
to address only respondent’s determination in the notices of
deficiency. For the most part, respondent’s trial position is,
like petitioners’, based on the record and expertise offered. To
the extent that respondent’s experts have reached different
amounts than respondent’s determinations, the experts’
conclusions would result in reduced deficiencies for petitioners.
Finally, petitioners should not be heard to complain in this
manner when they are, to some degree, responsible for the
differences in respondent’s trial position and the notice
determinations. Petitioners resisted respondent’s pre-notice
requests for information. As previously pointed out in this
opinion, the movement of information from the parties, especially
from petitioners to respondent, was slow and dilatory.
Respondent’s trial position has evolved with the receipt of
information from petitioners, which continued into the middle
portion of a lengthy trial.
     Throughout the pretrial involvement of the Court, the
parties were required to define and explain their positions for
purposes of trial in numerous telephone conversations and in
written documents pursuant to orders and otherwise. Accordingly,
there can be no claim of surprise or prejudice by either party on
this point. In this setting, petitioners’ attempt to limit the
arguments and evidence in these cases to the position of an
earlier day less-well-informed adversary must fail.
                               - 155 -

representative of an arm’s-length rate than the 2-percent rate

used by DHL and DHLI.   Our decision is based on the comparables

used by respondent’s expert and our holding that less of the

intangible value resides in the trademark and that the value must

therefore reside in other assets and intangibles.   As advocated

by petitioners, that value should reside in the ability to

deliver packages efficiently and effectively.   We agree that the

know-how and operating ability constituted an important

intangible aspect that was, in some part, responsible for the

success of the DHL network.   Accordingly, the use of those

valuable intangible assets would warrant a fair return.    A higher

markup was not advocated by either party in connection with the

type of reciprocal agreement as the one between DHL and DHLI.    In

that regard, petitioners’ expert used, among others, a 15-percent

markup in the context of a total cost reimbursement environment,

which, as we have explained, does not represent the transaction

under consideration and does not represent an arm’s-length

arrangement in the context of these cases.   Accordingly, we

sustain respondent’s trial position for cost plus 4 percent on

imbalances and transfers for 1979 through 1992.

     D. Network Fee

     Respondent determined that one-half of the network fees that

DHLI collected from agents and subsidiary operating companies

should be allocated under section 482 to DHL.   Based on
                               - 156 -

respondent’s expert’s report, the adjustment for the 1985 through

1992 years would total $96.772 million.

     Respondent’s position on this allocation is that the DHL

shareholders collectively controlled the entities and that the

stated ownership did not represent the true relationship between

the shareholders.   Respondent builds on this supposition by

contending that the shareholders would not divide the network

operating profits on the basis of stock ownership.   According to

respondent, because the DHL shareholders’ stock ownership did not

represent their actual interests, the shareholders would divide

profits based on their actual interest related to the DHL network

as a whole.   Using this type of analysis, respondent reaches the

conclusion that the shareholders’ “true economic arrangement was

akin to a partnership.”   The next step in respondent’s theory

involves a quantum leap from the shareholders’ relationships to

each other into the relationship between the corporate entities.

Respondent’s ultimate conclusion is that DHL, DHLI, and MNV were

engaged in a joint venture.   Using this conjecture-based

analysis, respondent proposes that his proffered expert’s opinion

should be followed to allocate a part of DHLI’s income to DHL.

Respondent’s expert proposed to combine the financial results of

all three entities (DHL, DHLI, and MNV) and to allocate their

combined profits in proportion to the cost borne by each, on the

basis of a similar type of analysis.
                                - 157 -

       Petitioners contend that respondent’s proposed network fee

adjustment and joint venture theory are baseless, without

substance considering the record, and inoperable as a matter of

law.    We agree with petitioners.   We have found as facts that DHL

and DHLI were allowed to operate and develop separately in their

own geographical markets.    The separate foreign operation and use

of DHLI was due to regulatory concerns, though it may have been

nurtured because of tax advantages.       The business entities within

and without the United States were allowed to operate

independently in terms of their marketplace but were commonly

controlled within the meaning of section 482.       In that

environment, DHLI, over time, was more successful than DHL.        That

is not to say that DHLI was allowed to become more successful by

the DHL shareholders.    DHLI, through the 1980’s, became the

leader in its market, and DHL was generally unsuccessful in its

attempt to increase its market share.       In this particular

context, the success of DHLI was not the result of the

manipulation of income or expense or the lack of arm’s-length

dealings.

       DHL and DHLI were separate in order to meet the legal

requirements for CAB certification.       Whether the shareholders

honored that separation in their shareholder relationship is a

question that would affect their income from any sale of the

entities or in the division of residual corporate income.        The

shareholders’ hypothecation of shareholding ownership should not,
                               - 158 -

per se, govern the question of whether the income of the

corporations was being earned at arm’s length.

     In a similar vein, the Commissioner has not met with success

when using section 482 to allocate income to a taxpayer who could

not legally receive said income.    Commissioner v. First Sec.

Bank, N.A., 405 U.S. 394, 403 (1972); Procter & Gamble Co. v.

Commissioner, 95 T.C. 323, 339 (1990), affd. 961 F.2d 1255 (6th

Cir. 1992).   Here, DHL was divided into domestic (DHL) and

foreign (DHLI) operating entities to comply with CAB

requirements.   Ultimately, that division resulted in better

income performance for the foreign entity (DHLI).   The purpose of

the division was not to shift profits artificially.

     Although we found it appropriate to look to the manner in

which the shareholders divided the proceeds from the 1990 to 1992

transaction for purposes of deciding whether there was section

482 common control, it is not appropriate to use that as a

premise for respondent’s tortured syllogism.

     As a factual matter, we are unable to find that there was

artificial shifting of net incomes of controlled taxpayers with

respect to DHL’s and DHLI/MNV’s profits.   Petitioners have shown

that, for the most part, DHLI’s success was attributable to its

own actions and operations and not to DHL’s efforts.

Accordingly, respondent is without authority to attempt to place

them on a parity with uncontrolled, unrelated taxpayers.

Hospital Corp. of Am. v. Commissioner, 81 T.C. 520, 594 (1983),
                                - 159 -

and cases cited therein.    The separate existence of DHL and

DHLI/MNV was not, in this context, used to facilitate the

artificial shifting of the net incomes in the form of the network

fees or in the context of respondent’s supposition of a

partnership or joint venture.    Accordingly, we hold that

respondent’s so-called Network Fee section 482 determination is

not sustained because petitioners have shown an abuse of

respondent’s discretion.    See Paccar, Inc. v. Commissioner, 85

T.C. at 787.

VI. Are Petitioners Entitled to Setoffs to Any of the Section
482 Allocations That Have Been Sustained?

     Petitioners contend that they are entitled to setoffs for

two types of items.   One concerns a 1984 sale of LaserNet from

DHL to DHLI, and the other concerns the total cost theory

developed by petitioners’ expert concerning the imbalance

adjustment.    Petitioners rely on section 1.482-1(d)(3), Income

Tax Regs., which provides that if the district director makes a

section 482 allocation,

     The district director shall also consider the effect of
     any other nonarm’s length transaction between * * *
     [the controlled parties] in the taxable year which, if
     taken into account, would result in a setoff against
     any allocation which would otherwise be made, provided
     the taxpayer is able to establish with reasonable
     specificity that the transaction was not at arm’s
     length and the amount of the appropriate arm’s length
     charge. * * *

     As to petitioners’ and their expert’s theory on imbalance

based on total costs for services as opposed to costing only the

excess in a reciprocal service arrangement, we have already held
                               - 160 -

that it does not represent an arm’s-length approach.      In other

words, petitioners’ suggested approach for total cost is not “any

other nonarm’s length transaction”.      Instead, it represents

nothing more than an alternative position being argued for

purposes of trial.   Accordingly, further consideration of whether

respondent should have permitted such a setoff in accord with the

above provision of the regulation is unnecessary.

     Concerning the LaserNet item, petitioners offered an expert

in software technology who opined that the LaserNet technology

sold by DHL to DHLI in 1984 had a value of between $1 million and

$1.45 million, rather than the $14.5 million price paid by DHLI.

Accordingly, petitioners seek a $13.05 million setoff to the 1984

allocation.   Respondent’s 1984 imbalance, transfer, and royalty

allocations, as advanced at trial, are less than the proposed

setoff amount, and accordingly no 1984 adjustment would result if

petitioners are sustained on this item.      As a factual matter, we

have found that a major purpose of the sale of LaserNet from DHL

to DHLI was to raise capital for DHL, which was engaged in

expansion and experiencing financial difficulties.

     The peculiarity of this situation is that petitioners, who

first argued that they were not commonly controlled during 1984

and that all transactions between the entities were at arm’s

length, now admit and urge that this transaction was not at arm’s

length; i.e., that more than fair market value was paid as a

pretense for a capital contribution from DHLI to DHL at a time of
                               - 161 -

financial need.   The purpose of the above-quoted regulation,

however, is to keep the Commissioner from missing or selectively

choosing only those allocations that would increase a taxpayer’s

income.

     A procedural point also has surfaced concerning the setoff

question.   Section 1.482-1(d)(3), Income Tax Regs., provides for

taxpayers to give notice to the district director as to the basis

of claimed setoffs within 30 days of an examination report that

notifies the taxpayer of proposed adjustments.   One stated

purpose for this provision is to allow the examining agent

sufficient time to correct erroneous allocations.   See Rev. Proc.

70-8, 1970-1 C.B. 434.   Clearly, the notice requirement, in the

context of the pre-statutory-notice period, is to facilitate

complete or thorough determinations.

     Respondent, however, did not provide petitioners with an

examination report before the issuance of the notices of

deficiency.   Accordingly, petitioners could not give notice of

setoffs to the district director within 30 days of an examination

report.   In this situation, petitioners argue that section 1.482-

1(d)(3), Income Tax Regs., has no application.   Petitioners did

provide notice of claimed setoffs after respondent issued the

deficiency notices.

     Respondent, without commenting on the regulatory

requirement, complained that petitioners waited until the last

possible moment to raise the issue of valuation of the technology
                               - 162 -

it sold in 1984.   Respondent noted that petitioners blamed their

failure to give notice on respondent’s failure to explain the

adjustments in the notices of deficiency.    In that regard,

respondent also noted that petitioners were provided, pursuant to

the Court’s requirement, a detailed and specific explanation of

adjustments on October 28, 1996, about 3 months before expert

reports were to be filed with the Court.    Petitioners’ claim of

setoff was made on January 31, 1997, at about the time of the

submission of expert reports to the Court.

     We agree with petitioners that the regulation should not be

a procedural impediment to any appropriate setoff under these

circumstances.   As to respondent’s complaint about the timeliness

of petitioners’ notice, respondent has not argued that he was in

any way specifically prejudiced by the timing of the notice.

     Finally, we hold that petitioners are entitled to a setoff

of respondent’s 1984 section 482 adjustments that we have

sustained.   The record reflects that DHLI never used the

technology and that the technology did not have the type of value

attributed to it in the 1984 sale of technology transaction

between DHL and DHLI.   Petitioners’ expert’s opinion contains

reasonable assumptions and comports with the record in these

cases.   Accordingly, we find and hold that the amount of the

setoff for the 1984 tax year equals the $13.05 million difference

between the stated $14.5 million sale price and a $1.45 million
                                  - 163 -

fair market value or arm’s-length price of the LaserNet

technology.

VII.    Section 6662 Penalties

       For each of the 3 taxable years, respondent determined

accuracy-related penalties under section 6662.         In particular,

for each year, respondent alternatively determined that either

the 40-percent gross valuation misstatement penalty under section

6662(h) is applicable or that the 20-percent penalty under

section 6662(b) is applicable.      Section 6662(b) lists the types

of underpayments to which the 20-percent penalty of section

6662(a) applies, including:      (1) Negligence or disregard of

rules, (2) substantial understatements, and (3) substantial

valuation misstatements.    Substantial valuation misstatements

include determinations under section 482 where the reported price

is 200 percent or more (or 50 percent or less) of the arm’s-

length price.    Sec. 6662(e)(1)(B).        Section 6662(h) imposes a 40-

percent penalty on “gross valuation misstatements”, which include

determinations under section 482 where the reported price is 400

percent or more (or 25 percent or less) of the arm’s-length

price.    If section 6662 is applicable, the question of which

valuation misstatement penalty (substantial or gross) applies is

purely a question of computation.

       No penalty may be imposed under section 6662 if reasonable

cause exists and the taxpayer acts in good faith.         Sec. 6664(c).

Despite the general application of section 6664(c), Congress
                                - 164 -

included an additional reasonable cause and good faith exception

to the section 6662(e) penalty for transfer pricing valuation

misstatements.    Finally, the substantial understatement penalty

does not apply to understatements attributable to (1) items

supported by “substantial authority” or (2) items that are

“adequately disclosed” on the return.     Sec. 6662(d)(2)(B).    With

respect to the section 6662 determinations, petitioners bear the

burden of showing that the penalty does not apply.     Rule 142(a);

Tweeddale v. Commissioner, 92 T.C. 501, 505 (1989) (citing Bixby

v. Commissioner, 58 T.C. 757, 791 (1972)).

     Negligence includes any failure “to make a reasonable

attempt to comply with the provisions of this title”.     Sec.

6662(c).   A taxpayer may not be negligent where the taxpayer

relies in good faith upon an appraisal in reporting a

transaction.    Petitioners argue that they relied in good faith

upon Bain’s $20 million appraisal of the trademark rights that

DHL conveyed.    Petitioners point out that Bain was well known to

them and had worked on strategy and planning in connection with

the UPS discussions, assisted in the UPS negotiations, and

prepared the PLP costing model used by DHL and the PRISM costing

model used by DHLI.    Petitioners claim that they relied on Bain’s

background and expertise and that the reliance was reasonable, so

they were not negligent in reporting the $20 million gain from

the trademark sale.
                              - 165 -

     Petitioners, in a footnote on brief, also presented the

following case analysis:

          Sammons v. Commissioner, 838 F.2d 330, 337 (9th
     Cir. 1988), [affg. in part and] rev’g [in part] T.C.
     Memo. 1986-318 (no negligence when taxpayer relies on
     an appraisal that is at least “reasonably debatable”);
     McMurray v. Commissioner, 985 F.2d 36, 42-43 (1st Cir.
     1993), [affg. in part,] rev’g [and remanding] T.C.
     Memo. 1992-27 (absent evidence of bad faith, expert
     valuation precludes negligence penalty, even if opinion
     given no weight in determining value). Further, courts
     are reluctant to find negligence where the transactions
     are complex and no clear authority exists. Kantor v.
     Commissioner, 998 F.2d 1514, 1522 (9th Cir. 1993),
     [affg. in part and] rev’g [in part] T.C. Memo. 1990-380
     (negligence not found, no authority squarely addressing
     questions in issue); Foster v. Commissioner, 756 F.2d
     1430, 1439 (9th Cir. 1985), [affg. in part and vacating
     in part] * * * 80 T.C. 34 [1983] (negligence not found;
     no clear authority; complex section 482 issues
     involved).

We did not find a factual fit with the cited cases or a reason to

apply the same rationale under the factual findings we have made

in these cases.

     Additionally, respondent asks us to take cognizance of the

familiarity of Bain to petitioners and their worldwide network.

Respondent’s argument implies that familiarity allowed

petitioners and/or their representatives to cause a valuation

that fit within their structuring of the transaction.    Respondent

contends that the Bain comfort letter had been manipulated by

DHL’s attorney/representatives to support a predetermined value.

We have found that the parties did not respect the values of

individual assets and, instead, worked together to reach an

agreement within the context of a fixed offer price from the
                                - 166 -

foreign investors.    In that context, the foreign investors placed

a $50 million “value” on the trademark to infuse capital into

DHL.    Without first obtaining a valuation, petitioners’

representatives reduced the value to $20 million for tax and

other purposes.    At one point, the DHL shareholders made a

counteroffer of $100 million for the trademark.     After all of

that maneuvering, Bain was given the job of valuing the trademark

and supported the $20 million figure.     In this connection,

respondent points out that, although the Bain “valuation” was in

the record and testimony offered in connection with it, Bain was

not offered as an “expert” in support of the $20 million value.

In that connection, petitioners did offer several other experts

who attempted to sustain the $20 million value.

       Considering all of the above, we hold that it was not

reasonable for petitioners to rely on (or more properly hide

behind) the Bain appraisal or comfort letter.     If the parties to

the transaction had given the valuation to an independent

valuation entity before any values being placed on the trademark

by the parties and/or not advised the evaluator of a value, it

might have been reasonable for petitioners to rely on such an

appraisal.29   As this trial has again demonstrated, parties can

find experts who will advance and support values that favor the

position of the person or entity that hired them.


       29
        We would find it difficult to believe that Bain
independently reached the same $20 million figure as the parties
and/or their representative had already devised.
                                - 167 -

     As to the royalty, the imbalance/transfer fee, and the

“network fee/joint venture” allocations, petitioners argue that

their reporting positions were reasonable and well founded.

Respondent disagrees and contends that the corporate entities

were manipulated by the shareholders.     We agree with petitioners

with respect to the imbalance, transfer fees, and network fee

adjustments.   Obviously, because we have decided that no network

fee adjustment is appropriate, it will not be subject to the

penalty.   With respect to the imbalance and transfer items in the

years before the Court, petitioners used what we have found was

an arm’s-length approach in computing the amounts paid for those

items.   For the years 1990, 1991, and 1992, the only difference

between the reporting position and respondent’s trial position is

the 2-percent differential in the markup, which represented a

relatively small difference.

     With respect to the royalty reporting position, we have a

different perspective.   We have found that in an arm’s-length

transaction, DHLI (the licensee) would have paid a royalty for

the use of the DHL trademark.    The fact that no royalty was paid

to DHL was attributable to the lack of arm’s-length conditions

when the 1974 MOA was created and went into effect.    That

royalty-free arrangement was perpetuated until the foreign

investors became a collective majority in the international

portion of the DHL network, and DHL transferred its ownership in

the trademark to another entity.     Up until the time the foreign
                                 - 168 -

investors became involved, no question about DHL’s ownership and

the 1974 MOA had been raised, except by DHLI’s general counsel,

who had his own view about the registration and ownership of the

trademark outside the United States.          There is no indication that

his view was shared by management or the respective corporate

shareholders.   It was not until the negotiations with the foreign

investors and intensive due diligence and when individuals became

motivated to reduce the contract price or value of the trademark

that the general counsel’s point of view about the ownership of

the DHL trademark gained support.          Accordingly, we hold that

petitioners’ royalty-free reporting position was not reasonable.

     Petitioners also argue that they had substantial authority

for their reporting positions.     Section 1.6662-4(d)(3)(iii),

Income Tax Regs., provides that “substantial authority” includes

applicable Code provisions, regulations, and court cases.

Petitioners contend that they complied with the arm’s-length

standard of section 482 because their reporting position for the

trademark sale reflects the value determined through arm’s-length

negotiations.   Petitioners also rely on Ciba-Geigy Corp. v.

Commissioner, 85 T.C. 172, 226-227 (1985), where the Court relied

upon offers from an uncontrolled party, including an offer made a

year before the controlled license in deciding an arm’s-length

royalty question.

     The question of substantial authority here is not so much

one of legal authority, as of factual authority for the reporting
                               - 169 -

positions regarding the trademark and royalties.     As we have

already explained, petitioners did not have substantial factual

“authority” for their reporting position on the trademark and

royalties.   The fact pattern here does not fit within the cases

cited by petitioners.   Moreover, petitioners clearly fell within

the ambit of section 482 and the appropriate regulations with

respect to the trademark and royalties.

     Petitioners also argue that they had reasonable cause within

the meaning of section 1.6664-4(b)(1), Income Tax Regs.       The

determination of whether a taxpayer acted with “reasonable cause

and in good faith” is made on a case-by-case basis, taking into

account all pertinent facts and circumstances, the most important

of which is the extent of the taxpayer’s efforts to assess his

proper tax liability.   Petitioners argue that they had reasonable

cause here because of their reliance on the advice of

professionals, such as an appraiser.     As we have already

explained above, petitioners’ reliance on Bain was not well

founded.

     Finally, as a computational matter, the 40-percent penalty

of section 6662(h) applies to the trademark adjustment because

there is a gross valuation misstatement.     In that regard, the $20

million reporting position was 25 percent or less than the fair

market value or arm’s-length price.      Because we have found that

the adjustment should be made in 1992, section 6662(h) will apply

only to the trademark adjustment for the 1992 year.     The royalty
                                 - 170 -

adjustments for all 3 years shall be subject to the 20-percent

penalty of section 6662(b).   With respect to the remaining

adjustments, section 6662 is not applicable.

     To reflect the foregoing,

                                           Decisions will be entered

                              under Rule 155.
                                - 171 -

                             APPENDIX

     1.   Newco (ITS) would recapitalize in accordance with the

ITS stock purchase agreement;

     2.   Robinson and ALTD would sell 10,764 Newco shares to the

purchasers for $53,097,736 (JAL and Lufthansa each 4,780 shares

for $23,579,262 and Nissho Iwai 1,204 shares for $5,939,212) in

accordance with the amended and restated ITS stock purchase

agreement;

     3.   Newco would issue 8,054 Newco shares to the purchasers

for $39,725,000 (JAL and Lufthansa each 3,222 shares for

$15,890,000 and Nissho Iwai 1,610 shares for $7,945,000);

     4.   under the asset transfer agreement, International would

sell assets with a value of $39,725,000 to Newco for a like

amount of cash;

     5.   the purchasers would sell to Mattawan all of their

International shares in exchange for Mattawan demand promissory

notes (JAL and Lufthansa 646,000 shares each for $15,890,000 and

Nissho Iwai 323,000 shares for $7,945,000);

     6.   International would declare and pay a $39,725,000 cash

dividend to Mattawan that would in turn use the cash to repay the

notes issued in step 5;

     7.   Newco would issue an additional 38,684 Newco shares to

the purchasers for $177,411,262 and the shares representing the

12.5-percent interest in MNV (JAL and Lufthansa each 16,999

shares for $78,599,196 and 5 percent of MNV’s shares and Nissho
                                - 172 -

Iwai 4,686 shares for $20,212,870 and 2.5 percent of MNV’s

shares);

     8.    under the asset transfer agreement, International would

sell all its remaining assets to Newco in exchange for (1) the

assumption by Newco of the designated liabilities, (2)

$142,356,262 in cash (subject to a closing adjustment) and (3)

31,779 Newco shares;

     9.    International would declare and pay as a dividend to

Mattawan the $142,356,262 and 31,779 Newco shares received in

step 8;

     10.    Mattawan would transfer to Express B.V. all of its

outstanding shares of International (11,305,000 shares directly

owned by Mattawan and 1,615,000 shares indirectly owned by

Mattawan pursuant to step 5) in exchange for the payment by

Express B.V. of $15,055,000.

     The steps of the Newco Share Alternative pursuant to the

amended share purchase and option agreement, as amended, were

depicted schematically as follows:



[REPORTER'S NOTE:    SCHEMATIC ILLUSTRATION ACCOMPANYING OPINION

WAS NOT ELECTRONICALLY REPRODUCIBLE.]
