- 11 -
OPINION
The issue in this case is whether petitioner obtained a
covenant not to compete that is valid for Federal income tax
purposes. A covenant not to compete is an intangible asset that
may be amortized over its useful life. See Warsaw Photographic
Associates, Inc. v. Commissioner, 84 T.C. 21, 48 (1985). Seeking
the benefit of amortization deductions, petitioner argues that
$300,000 of the $1.3 million in cash and receivables paid to
Wagner in the buyout is allocable to a covenant not to compete.
Respondent argues that the full $1.3 million was paid to Wagner
in exchange for his Sharewell stock. For the reasons discussed
below, we agree with petitioner.
Parol Evidence Concerns
In determining whether petitioner and Wagner entered into a
valid covenant not to compete, we must first decide what evidence
of their agreement incident to the buyout of Wagner we may
consider. Respondent argues that their agreement is contained in
the four corners of the Purchase Agreement, which makes no
reference to a covenant not to compete, and that the Noncompete
Agreement, which does, is parol or extrinsic evidence that cannot
be considered under the Danielson rule. In Commissioner v.
Danielson, 378 F.2d 771, 775 (3d Cir. 1967), vacating and
remanding 44 T.C. 549 (1965), the Court of Appeals for the Third
Circuit precluded a taxpayer's use of extrinsic evidence to
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011