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that the sale of P's franchisor's interest produced
U.S. source income under sec. 865(d)(1), I.R.C.
Held: The goodwill inherent in the Mister Donut
business in Asia and the Pacific was embodied in, and
inseverable from, P's franchisor's interest and
trademarks that were conveyed to D. The income
attributable to the sale of P's franchisor's interest
and trademarks constitutes U.S. source income under
sec. 865(d)(1), I.R.C.
Held, further: P's covenant not to compete, which
prohibited P from carrying on any business similar to
Mister Donut or disclosing any part of the Mister Donut
System in specified Asian and Pacific countries,
possessed independent economic significance and is
severable from P's franchisor's interest and
trademarks.
Held, further: P has not shown that more than
$300,000 of the sale price should be allocated to the
covenant not to compete. R concedes that any amount
allocated to the covenant constitutes foreign source
income.
Held, further: A pro rata portion of P's selling
expenses must be allocated to the sale of the covenant
not to compete. Sec. 862(b), I.R.C.
David R. Brennan, John K. Steffen, Susan B. Grupe, and
Nathan P. Zietlow, for petitioner.
Jack Forsberg, for respondent.
RUWE, Judge: Respondent determined deficiencies in
petitioner's Federal income taxes as follows:
Taxable Year Ended Deficiency
Feb. 28, 1987 $2,962,380
Feb. 29, 1988 3,592,402
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