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Ignoring the $1,290,000 cash paid at closing purportedly for
the covenant not to compete, the total of $876,000 that was paid
for 1990, 1991, and 1992 for the covenant not to compete
($292,000 for each of 1990, 1991, and 1992), strongly resembles
International's original counteroffer under which a total of
$750,000 was to be paid for the covenant not to compete.
We conclude that the $1,290,000 cash paid at closing
purportedly relating to the covenant not to compete does not
reflect economic reality, should be treated as consideration paid
for the assets of MCB, and constitutes a nondeductible capital
expenditure. We also conclude that the cumulative $876,000 paid
for 1990, 1991, and 1992 for the covenant not to compete does
reflect economic reality, and the deductions relating thereto (to
be amortized over 3 years) are deductible as current business
expenses for each year.
Amounts Paid to Meyer as a Salary Bonus
Under section 162(a)(1), ordinary and necessary business
expense deductions are allowed, including reasonable allowances
for salaries or other compensation paid for personal services.
Sec. 1.162-7(a), Income Tax Regs. More specifically with regard
to salary bonuses, amounts paid for salary bonuses to employees
are deductible "when * * * made in good faith and as additional
compensation for the services actually rendered by the employees,
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