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deductible as loan fees or compensation paid to FNBB under
section 83.2
OPINION
$5 Million Paid to Cruze as Covenant Not to Compete
For the years in issue, amounts paid for covenants not to
compete generally are deductible over the useful life of the
covenants as current business expenses; whereas amounts paid for
goodwill or going concern value of a business generally are
treated as nondeductible capital expenditures. Warsaw
Photographic Associates, Inc. v. Commissioner, 84 T.C. 21, 48
(1985).
To be respected for Federal income tax purposes, covenants
not to compete should reflect economic reality. Patterson v.
Commissioner, 810 F.2d 562, 571 (6th Cir. 1987), affg. T.C. Memo.
1985-53; Lemery v. Commissioner, 52 T.C. 367, 375 (1969), affd.
per curiam 451 F.2d 173 (9th Cir. 1971). Where parties to
purported covenants not to compete do not have adverse tax
interests, the covenants will be strictly scrutinized. Schulz v.
Commissioner, 294 F.2d 52, 55 (9th Cir. 1961), affg. 34 T.C. 235
2 Also after trial, on June 2, 1997, petitioner filed under
Rule 41 a motion for leave to amend the petition for 1993 and
1994 in order to claim that capitalized costs of $586,236 and
832,706, respectively, should be allowed as deductible current
business expenses relating to petitioner’s mailing and shipping
operations. We deny petitioner's motion for leave to amend the
petition and to raise this new issue at this late date. Rule
41(a); Law v. Commissioner, 84 T.C. 985, 990 (1985); O'Rourke v.
Commissioner, T.C. Memo. 1990-161.
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