- 35 -
printing in 1985 in order to maintain its tax-exempt status and
that DM did not intend to return to the commercial printing
business. Without an intent to compete, AVG believed that the
covenant lacked economic meaning. In addition, petitioner
indicated to AVG that customer referrals by DM were rare.
Taxpayers may amortize the amount paid for a covenant not to
compete over its useful life. Sec. 167(a); Warsaw Photographic
Associates, Inc. v. Commissioner, 84 T.C. 21, 48 (1985). A
covenant not to compete must have "economic reality"; i.e., some
independent basis in fact or some arguable relationship with
business reality so that a reasonable person would bargain for
the agreement. Patterson v. Commissioner, 810 F.2d 562, 571 (6th
Cir. 1987), affg. T.C. Memo. 1985-53; Beaver Bolt, Inc. v.
Commissioner, T.C. Memo. 1995-549. The parties did not allocate
a portion of the royalties to the covenant.
Courts apply numerous factors in evaluating a covenant not
to compete. These include: (a) The grantor's (i.e.,
covenanter's) business expertise in the industry; (b) the
grantor's intent to compete; (c) the grantor's economic
resources; (d) the potential damage to the grantee posed by the
grantor's competition; (e) the grantor's contacts and
relationships with customers, suppliers, and other business
contacts; (f) the grantee's interest in eliminating competition;
(g) the duration and geographic scope of the covenant; and (h)
the grantor's intention to remain in the same geographic area.
Warsaw Photographic Associates, Inc. v. Commissioner, supra.
Page: Previous 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 NextLast modified: May 25, 2011