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this payment originated with V. Eihusen’s attempt to regain his
former positions with petitioner. According to respondent,
ensuring that this attempt is unsuccessful “can” increase the
value of petitioner. Petitioner argues that the payment is
deductible under section 162(a) in that the payment was made in
part to defend against attacks on petitioner’s business practices
and, as to the rest, made in cancellation of an employment
agreement. We agree with petitioner.
This Court has recently concluded that an expenditure must
be capitalized when it (1) creates or enhances a separate and
distinct asset, (2) produces a significant future benefit, or (3)
is incurred “in connection with” the acquisition of a capital
asset. Lychuk v. Commissioner, supra at 385-386. Respondent
focuses his argument on the first and third prongs. Respondent
does not assert, and thus we have no occasion to find, that any
portion of petitioner’s payment to V. Eihusen produced a
significant long-term benefit to petitioner so as to require that
this payment be capitalized under INDOPCO, Inc. v. Commissioner,
503 U.S. 79 (1992). As to the third prong, i.e., an expense
incurred in connection with the acquisition of a capital asset,
we reject that argument for the reasons discussed infra as to
section 162(k). As to the first prong, i.e., creation or
enhancement of a separate and distinct asset, we conclude below
that the test of Lincoln Sav. & Loan is satisfied with respect to
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