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to delay the recognition of income on that payment. Mr. Lynch
suggested treating the payment as an “option contract”, and thus
delay recognition of income on the payment. William and Mary Ann
Becker timely filed a Federal income tax return for 1991, did not
report the $5 million payment as taxable income, and attached a
“disclosure statement” explaining Mr. Lynch’s “option contract”
theory. In 1994, William and Mary Ann Becker were audited,
respondent rejected their treatment of the $5 million payment,
and they paid their Federal income tax deficiency in full.
On its Federal consolidated corporate income tax return for
the taxable year ended September 30, 1991, BHC claimed an
amortization deduction of $1,061,833 based on a reported basis of
$6,371,000 for the covenant not to compete. Neither BHC’s tax
return for the taxable year ended September 30, 1991, nor William
and Mary Ann Becker’s tax return for 1991 is at issue in this
case.
On their Federal income tax return for 1996, William and
Mary Ann Becker treated the payment received from BHC on May 22,
1996, as capital gain attributable to the sale of William
Becker’s stock in BHC. On June 4, 2002, respondent issued a
notice of deficiency determining a deficiency of $615,681 for
1996. The deficiency was the result of respondent’s
determination that William Becker must recognize $5,307,600 of
the payment received from BHC as ordinary income attributable to
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