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dispute the adjustments in the notice of deficiency and claim
that they overpaid income taxes by $888 for 1988, $11,247 for
1989, and $1,363 for 1991.
II. OPINION
A. Covenant Not To Compete
1. Petitioners' Contentions
Cost Less amortized over 7 years all of the $175,000 payment
it made to Jasiak to buy Jasiak's stock. Petitioners now contend
that Cost Less may amortize only $165,000 of the $175,000 (i.e.,
the difference between $175,000 and what petitioners contend is
the $10,000 book value of Jasiak's Cost Less stock).
In the alternative, petitioners contend that Cost Less may
amortize amounts based on the value of the covenant not to
compete. Petitioners point out that Jasiak orally promised that
he would not compete against Cost Less around the time Cost Less
agreed to buy Jasiak's stock. Petitioners contend that the
amounts paid by Cost Less to Jasiak were consideration for
Jasiak's oral promise not to compete.
2. Analysis
A taxpayer may amortize a covenant not to compete from a
departing shareholder if the parties intended that some of the
payment from the business to the departing shareholder was for
the covenant, and the amount agreed to be paid for the covenant
reflected economic reality. See Patterson v. Commissioner, 810
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