- 8 -
8.26-percent stock interest in DP that Haas received should be
excluded from Haas’ income.4
OPINION
$190,000 Relating to Covenant Not To Compete
Under section 162(a), a taxpayer may deduct all ordinary and
necessary expenses incurred in carrying on a trade or business.
Generally, amounts paid for covenants not to compete are
amortized over the life of the covenants as current business
expenses. See Warsaw Photographic Associates, Inc. v.
Commissioner, 84 T.C. 21, 48 (1985). Amounts paid, however, for
goodwill or for going concern value of a business generally are
treated as nondeductible capital expenditures. See 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. See Patterson v.
Commissioner, 810 F.2d 562, 571 (6th Cir. 1987), affg. T.C. Memo.
1985-53; Lemery v. Commissioner, 451 F.2d 173, 174 (9th Cir.
1971), affg. per curiam 52 T.C. 367 (1969).
The division between Haas and Petrie was acrimonious and
strained, and we are satisfied that Petrie could have made a
4 Amortization deductions were also claimed for the $10,000
relating to the client records, which respondent did not
disallow.
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