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Generally, when the Commissioner presents evidence which, if
credited by the Court, is sufficient to support a decision in the
Commissioner's favor, there will be a reasonable basis for the
Commissioner's position. See Wilfong v. United States, 991 F. 2d
359, 369 (7th Cir. 1993).
From the onset of the underlying actions, respondent
questioned the valuation of the covenant not to compete.
Respondent was primarily concerned with how the total amount paid
to Brigitte was allocated between the stock redemption price and
the covenant not to compete. Such concern is clearly legitimate.
There has been a great deal of litigation involving the
allocation of a purchase price to a covenant not to compete.
See, e.g., Throndson v. Commissioner, 457 F.2d 1022, 1024 (9th
Cir. 1972), affg. Schmitz v. Commissioner, 51 T.C. 306 (1968);
Commissioner v. Danielson, 378 F.2d 771, 775 (3d Cir. 1967),
vacating and remanding 44 T.C. 549 (1965); Ullman v.
Commissioner, 264 F.2d 305, 307-308 (2d Cir. 1959), affg. 29 T.C.
129 (1957); Major v. Commissioner, 76 T.C. 239 (1981). The
principal inquiry has been whether the amount allocated to the
covenant not to compete reflected business reality or whether
that amount was artificially allocated to such covenant solely
for tax purposes.
Covenants not to compete are intangible capital assets and
their cost may be amortized over their useful lives. See
Peterson Machine Tool, Inc. v. Commissioner, 79 T.C. 72, 80
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