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Respondent determined deficiencies of $28,113 and $32,450 in
petitioner's Federal income taxes for fiscal years ending (FYE)
March 31, 1993 and 1996, respectively. The sole issue for
decision is whether, for FYE March 31, 1996, petitioner properly
deducted losses on its covenants not to compete. The decision on
the loss deductions determines petitioner's entitlement to a
deduction for a net operating loss carryback to FYE March 31,
1993.
Some of the facts have been stipulated and are so found.
The exhibits received into evidence are incorporated herein by
reference. At the time the petition in this case was filed,
petitioner's corporate offices were located in Heber, Arizona.
Background
Petitioner operates as a commercial logging business in
northern Arizona. The viability of the logging industry depends
on the availability of harvestable timber. To ensure an adequate
supply of timber, petitioner began to purchase assets and timber
sales contracts1 from its competitors.
In September 1987, petitioner leased real property,
including a sawmill, for logging activities from Parker Lumber
Company (Parker). The Parker lease agreement included a covenant
1 For purposes of this opinion, a timber sales contract is a
contract between a landowner and a logging company which
establishes the right of the company to harvest timber on a
specified piece of land, and what the company "was obligated to
do for that timber."
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