108 T.C. No. 3
UNITED STATES TAX COURT
INTERNATIONAL MULTIFOODS CORPORATION AND AFFILIATED COMPANIES,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11643-92. Filed January 29, 1997.
P was in the business of franchising the right to
operate Mister Donut shops in the United States and
abroad. On Jan. 31, 1989, P sold its Asian and Pacific
Mister Donut business operations for $2,050,000.
Pursuant to the agreement, P transferred its franchise
agreements, trademarks, Mister Donut System, and
goodwill for each of the Asian and Pacific countries in
which P had existing franchise agreements, as well as
its trademarks and Mister Donut System for those Asian
and Pacific countries in which it had registered
trademarks but did not have franchise agreements. In
the purchase agreement, P allocated $1,930,000 of the
sale price to goodwill and a covenant not to compete.
On its 1989 Federal income tax return, P reported the
income allocated to these assets as foreign source
income for purposes of computing P's foreign tax credit
limitation under sec. 904(a), I.R.C. R determined that
the goodwill and covenant not to compete were inherent
in P's franchisor's interest. R further determined
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