Question: Ranger Company, a U.S. taxpayer, manufactures and sells medical products for animals. Ranger holds the patent on Z-meal, which it sells to horse ranchers in the United States. Ranger Company licenses its Bolivian subsidiary, Yery SA, to manufacture and sell Z-meal in South America. Through extensive product development and marketing Yery has developed a South American llama market for Z-meal, which it sells under the brand name Llameal. Yery's sales of Llameal in Year 1 were $800,000 and its operating expenses related to these sales, excluding royalties, were $600,000. The IRS has determined the following:
Value of Yery's operating assets used in the production of Z-meal. . . . . . . . . $300,000
Fair market return on operating assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Percentage of Ranger's worldwide sales attributable to its intangibles. . . . . . . 10%
Percentage of Yery's sales attributable to its intangibles. . . . . . . . . . . . . . . . 15%
Required: Determine the amount that Ranger would charge as a license fee to Yery in Year 1 under the residual profit split method.