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In a memorandum dated September 8, 1988, Mr. Suess provided
draft language for a provision allocating the purchase price
between goodwill, trademarks, and petitioner's covenant not to
compete. In his memorandum, Mr. Suess stated:
In negotiating the allocation it is important to
note that the amounts allocated to goodwill and the
noncompete covenant, to the extent upheld upon IRS
audit, will be tax-free to Multifoods. The amount
allocated to the trademarks and pending trademark
applications will be subject to a tax of approximately
38% in the U.S. and potentially additional taxes in the
countries in which such trademarks are registered.
Therefore, to the extent that we can maximize the
allocation to the goodwill and non-compete covenant, we
will maximize Multifoods' after-tax gain on the sale.
You requested that I advise you of the potential
tax consequences to Duskin of the purchase price
allocation. As previously discussed, both goodwill and
trademarks are generally amortizable for tax purposes
in Japan. Non-compete covenants are also generally
amortizable for tax purposes in Japan. Therefore, it
is possible that Duskin may be indifferent to the
specific amounts allocated to each type of asset.
* * *
On or about January 27, 1989, petitioner obtained a draft of
an appraisal from the Valuation Engineering Associates Division
of Touche Ross (Touche Ross), allocating the sale price among the
assets to be sold. Duskin was not involved in the selection of
Touche Ross, nor did it indicate to petitioner its preferred
allocation.
On January 31, 1989, Touche Ross submitted its final report,
which stated:
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