Beaver Bolt, Inc. - Page 3

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          was whether payments petitioner made to Jane Grecco (Grecco) were           
          for a covenant not to compete, as petitioner contended, or were             
          for her stock in petitioner.  Petitioner had a stock purchase               
          agreement with its officers, including Grecco, which gave                   
          petitioner the option to repurchase its stock owned by a                    
          terminated employee.  The agreement included a formula setting              
          the purchase price for the stock.  Grecco negotiated a financial            
          settlement with petitioner under which petitioner paid Grecco               
          $513,400 when she ceased working for petitioner.  Petitioner                
          treated $130,000 of this amount as payment for Grecco's stock in            
          petitioner and $383,400 as payment for the covenant not to                  
          compete.  Petitioner amortized $383,400 for the covenant not to             
          compete over 3 years.                                                       
               Respondent prepared an Engineering and Valuation report,               
          dated July 31, 1992, which concluded that Grecco's stock in                 
          petitioner was worth $739,000 on June 30, 1988, and the covenant            
          not to compete was worth $0.  Respondent disallowed petitioner's            
          amortization deductions in full in the notice of deficiency sent            
          on July 15, 1993.                                                           
               On April 18, 1994, petitioner's expert concluded that                  
          Grecco's stock was worth $190,000.  Petitioner's expert prepared            
          a stock valuation report, a copy of which respondent received on            
          June 24, 1994.  On August 22, 1994, respondent's expert concluded           
          that Grecco's stock was worth $188,600 and that the covenant not            
          to compete was worth $52,669.  On September 27, 1994, the parties           




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