- 16 -
to satisfy the objective portion of the worthlessness test.
Thus, the Court finds that sufficient factors objectively support
the worthlessness of petitioner's covenants not to compete. See
Oak Harbor Freight Lines, Inc. v. Commissioner, supra (An act of
Congress rendered motor carrier authorities worthless because all
rights associated with the authorities were eliminated). As a
result, the Court finds that all three of petitioner's covenants
not to compete became worthless on the date the prohibitory
injunction was issued.
Respondent argues that ABCO Oil Corp. v. Commissioner, T.C.
Memo. 1990-40, controls the outcome of this case. In ABCO Oil
Corp., the taxpayer purchased some of a competitor's assets.
And, in a related but separate agreement, the taxpayer entered
into individual 5-year noncompetition agreements with three of
the competitor's shareholders. Two of the three covenantees died
before the end of the 5-year noncompetition period. The taxpayer
deducted the amounts it still owed to the deceased covenantees.
The taxpayer argued that the noncompetition agreements became
worthless and that the deduction should be allowed pursuant to
section 1.167(a)-8(a)(3), Income Tax Regs. The Court in ABCO Oil
Corp. held that the death of the covenantees did not make the
covenants worthless; rather, the covenantees' "deaths extended
forever the duration of noncompetition." Id. Respondent argues
that ABCO Oil Corp. controls the decision in this case because of
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011