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Part of the covenant not to compete payments ($17,000 in 199018
and $65,192 in 1991) was disbursed from the sweep account for
other purposes. The parties agree that these amounts were
ordinary income to Henry and Esther and deductible by HJA.
F. Tax Treatment of Covenant Not To Compete Payments
For each taxable year 1990 through 1996, inclusive, HJA
issued a Form 1099 and sent a letter of explanation to Henry that
showed the amount of covenant not to compete payments made to
Henry or for his benefit in that year. In 1990, Henry and Esther
reported $161,036 of the $213,900 of the covenant not to compete
payments as ordinary income.19 Henry and Esther did not include
any other covenant not to compete payments in income for any of
the years at issue.
Henry and Esther claimed interest expense deductions on
their joint individual Federal income tax returns for interest
payments made on the Chevrolet debt as follows:
Year Interest deduction
1989 Unknown
1990 $43,440
18The parties agree that Henry is entitled to deduct, as an
itemized deduction, the trustee fee of $500 paid in 1990 from the
sweep account.
19The parties have agreed that the remainder of the 1990
convenant not to compete payments, which was not disbursed to
Henry until 1991, was ordinary income to Henry in 1991.
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