I. Issue:
Whether the fifteen year amortization rule applies to the covenant not to compete in connection with the stock sale agreement.
II. Applicable Law:
§197(a);(d)(1)(E)
Reg § 1.197-2(b)(9)
Frontier Chevrolet Co v. Com., (2003, CA9) 91 AFTR 2d 2003-2338 (329 F.3d 1131)
III. Discussion of the Law:
Section 197(a), establishes that a taxpayer is allowed to take an amortization deduction under section 197 intangibles over a fifteen year period beginning in the month the intangible is acquired.
Under section 197(d)(1)(E) any covenant not to compete in connection with an acquisition that is directly or indirectly of an interest in a trade or business or substantial portion thereof is recognized as an intangible asset.
“The Tax Court accordingly determined that Section 197’s fifteen year amortization rule applied to covenant-not-to-compete which auto dealership entered in connection with its post 8-10-93 stock redemption agreement” Frontier Chevrolet Co v. Com., (2003, CA9) 91 AFTR 2d 2003-2338 (329 F.3d 1131). According to the Tax Court the term acquisition is defined as “gaining possession or control over something”. The Court also defined the term redemption in relevance to securities as “the reacquisition of a security by the issuer”. When the two terms were defined and combined the tax court concluded that the Frontier’s redemption was an indirect acquisition because it regained possession and control over seventy-five percent of its stock. Thus, the covenant was treated as an intangible asset under section 197 and Frontier was required to amortize the stock over fifteen years rather than the life of the covenant-not-to-compete agreement.
IV. Application of the Law to the Problem:
The central issue is whether the section 197’s fifteen year amortization rule applies to the covenant not to compete in connection with the stock sale agreement. Crispy Donuts facts and circumstances are similar to those found in Frontier Chevrolet Co v. Com., (2003, CA9) 91 AFTR 2d 2003-2338 (329 F.3d 1131). Therefore, it is appropriate to apply the Frontier Chevrolet decision to Crispy Donut’s case. Like Frontier Chevrolet, Crispy Donuts redemption is an indirect acquisition because Crispy Donut’s regained possession and control over seventy-five percent of its
