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1990, $250,000 in February of 1992 for 1991, and $250,000 in late
1992 for 1992.
On Meyer's individual Federal income tax returns for 1990,
1991, and 1992, Meyer reported and treated as ordinary income the
$1,290,000 he received at closing under the purported covenant
not to compete, the three annual payments of $292,000 he received
under the covenant not to compete, and the three annual payments
of approximately $250,000 he received as salary bonuses.
On petitioners' consolidated corporate Federal income tax
returns for 1990, 1991, and 1992, ordinary business expense
deductions were claimed with respect to the covenant not to
compete in the respective amounts of $601,677, $722,000, and
$722,000 -- a total of $2,166,000.1 Also, ordinary business
expense deductions were claimed for 1990, 1991, and 1992 with
respect to the amounts accrued and/or paid to Meyer each year as
a salary bonus.
On audit, respondent disallowed petitioners' claimed
deductions relating to the covenant not to compete and to the
salary bonus on the grounds that the amounts paid as such
actually represent nondeductible capital expenditures.
1 The business expense deductions claimed for the covenant not
to compete represent a 3-year amortization of a total of
$2,045,677, which is $120,323 less than the total stated amount
of $2,166,000 purportedly paid for the covenant not to compete.
The $120,323 difference is not explained in the record, and the
$120,323 apparently has not been claimed as a business expense
deduction for the years in issue.
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