- 22 -
(5th Cir. 1994); Israel-British Bank (London), Ltd. v. FDIC, 536
F.2d 509, 512-513 (2d Cir. 1976); Edward B. Marks Music Corp. v.
Colorado Magnetics, Inc., 497 F.2d 285, 288 (10th Cir. 1974).17
Respondent contends that, although not denominated as such,
what Duskin acquired from petitioner was a territorial franchise
for the operating and nonoperating countries. Petitioner, on the
other hand, argues that it did not sell Duskin a franchise, but,
rather, the entire Mister Donut franchising business in Asia and
the Pacific. Petitioner maintains that the sale of a franchise
requires the franchisor to retain an interest in the business and
that petitioner failed to retain the requisite interest in this
case following the sale to Duskin. Petitioner contends that
section 1253(a) and our opinion in Jefferson-Pilot Corp. v.
Commissioner, 98 T.C. 435 (1992), affd. 995 F.2d 530 (4th Cir.
1993), support its interpretation of "franchise".
Although section 865 does not provide a definition of
franchise, section 1253(b)(1) defines it for purposes of section
16(...continued)
allocate any portion of the sale price to the franchise
agreements. Instead, petitioner allocated $1,930,000 to goodwill
and the covenant not to compete and later reported this amount as
foreign source income on its 1989 Federal income tax return.
Petitioner allocated the remaining $120,000 of the sale price to
the trademarks and reported this amount as U.S. source income on
its 1989 return.
17In Edward B. Marks Music Corp. v. Colorado Magnetics,
Inc., 497 F.2d 285, 288 (10th Cir. 1974), the court stated that
"it is the general rule that a proviso should be strictly
construed to the end that an exception does not devour the
general policy which a law may embody."
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