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OPINION
Amounts Paid to Meyer as Covenant Not To Compete
Amounts paid for covenants not to compete generally are
deductible over the life of the covenants as current business
expenses. Warsaw Photographic Associates, Inc. v. Commissioner,
84 T.C. 21, 48 (1985). Amounts paid, however, for goodwill or
for the going concern value of a business generally are treated
as nondeductible capital expenditures. Fong v. Commissioner,
T.C. Memo. 1984-402, affd. without published opinion 816 F.2d 684
(9th Cir. 1987).
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). Taxpayers generally
bear the burden of proving entitlement to claimed deductions.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
In 1990, at the time of the purchase of the assets of MCB,
Meyer was an experienced, relatively young, and successful
customs broker. As a result of his investments and the sale of
the assets of MCB, Meyer had sufficient capital available and the
ability to start a new customs brokerage business and to compete
effectively with International. We believe that the covenant not
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Last modified: May 25, 2011