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from, the franchisor's rights and trademarks acquired by Duskin.
Respondent maintains that any gain attributable to the sale of
franchises or the trademarks produces U.S. source income, as
section 865 generally sources income in the residence of the
seller. See sec. 865(a),(d)(1).
While there are no cases on point under section 865, case
law interpreting other provisions of the Code supports
respondent's position. In Canterbury v. Commissioner, 99 T.C.
223 (1992), we considered whether the excess of a franchisee's
purchase price of an existing McDonald's franchise over the value
of the franchise's tangible assets was allocable to the franchise
or to goodwill for purposes of amortization pursuant to section
1253(d)(2)(A). We recognized that McDonald's franchises
encompass attributes that have traditionally been viewed as
goodwill. The issue, therefore, was whether these attributes
were embodied in the McDonald's franchise, trademarks, and trade
name, which would make their cost amortizable pursuant to section
1253(d)(2)(A), or whether the franchisee acquired intangible
assets, such as goodwill, which were not encompassed by, or
otherwise attributable to, the franchise and which were
nonamortizable.
We found that the expectancy of continued patronage which
McDonald's enjoys "is created by and flows from the
implementation of the McDonald's system and association with the
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