Academic journal article Journal of Accountancy

Noncompete Agreement Is a Section 197 Intangible

Academic journal article Journal of Accountancy

Noncompete Agreement Is a Section 197 Intangible

Article excerpt

The First Circuit Court of Appeals, affirming the Tax Court, held that a covenant not to compete must be amortized over 15 years rather than its one-year term.

Recovery Group Inc. was an S corporation that provided services to insolvent companies. To buy out the interest of one of its founders, Recovery redeemed all of his stock, which represented 23% of all the corporation's stock. The buyout agreement included a noncompete covenant. Recovery amortized the covenant over its life of 12 months. The IRS determined that the covenant was an IRC [section] 197 intangible and therefore amortizable by Recovery over 15 years. Recovery petitioned the Tax Court.

Section 197(d)(1)(E) specifies that a section 197 intangible includes "any covenant not to compete (or other arrangement to the extent such arrangement has substantially the same effect as a covenant not to compete) entered into in connection with an acquisition (directly or indirectly) of an interest in a trade or business or substantial portion thereof."

Recovery argued that "interest in a trade or business" means a 100% ownership interest and that "thereof' modifies "interest in a trade or business," so that 15-year amortization would apply only to acquisition of a "substantial portion" of a trade or business. The IRS argued that "thereof' modifies "trade or business," so that 15-year amortization would apply to the acquisition of any interest in a trade or business. …

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