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$1.199 Million Paid to Panzica, Battistella, and Navarra
Amounts paid by taxpayers to employees as compensation for
services rendered in the current or prior years are generally
deductible as ordinary and necessary business expenses. Sec.
162(a); Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 119 (1930).
Amounts paid for covenants not to compete are amortized as
deductions over the life of the covenants. Warsaw Photographic
Associates, Inc. v. Commissioner, supra at 48.
Petitioner argues that $1.199 million of the total $1.25
million paid to Panzica, Battistella, and Navarra ($1.25 million
less the $51,000 associated with the principal and interest
payments on the loan petitioner received from Battistella) should
be treated for Federal income tax purposes as compensation paid
to the three employees in 1990 for services rendered to
petitioner in prior years. Petitioner argues that no portion of
the $1.199 million should be allocated to separate covenants not
to compete between petitioner and the employees.
Respondent argues that the entire $1.199 million, or some
portion thereof, should be allocated to covenants not to compete
between petitioner and the employees and allowed as deductions
and amortized only after the covenants begin to run once the
employees stop working for petitioner (i.e., in years not before
the Court).
We agree with petitioner.
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