International Multifoods Corporation and Affiliated Companies - Page 1

                                   108 T.C. No. 3                                     

                               UNITED STATES TAX COURT                                

             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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