The court pointed out that even if the word thereof modified “interest,” RGI’s argument that a 23% stock interest is not substantial is not “well-supported.” Moreover, the “anti-churning” portion of Section 197(f)(9), which is triggered in the case of a 20% stock interest, might suggest that that level of interest would be considered substantial. If that’s the case, then the 23% interest owned by E would also be substantial.
The court had previously held, in Frontier Chevrolet Co. v. Commissioner, 116 T.C. 289 (2001), aff’d. 329 F.3d 1131 (9th Cir. 2003), that a redemption of stock qualifies as “acquisition of an interest in a trade or business” and rejected the argument that the statute requires the acquisition of an interest in a new or different business. RGI’s citation of Frontier Chevrolet Co. is misplaced: that decision says nothing that would assist RGI.
Accordingly, the court concluded that RGI’s redemption of 23% of its stock from E was an acquisition of an interest in a trade or business. Therefore, the noncompete covenant is a Section 197 intangible, and RGI must amortize the cost of the covenant not to compete over 15 years.
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1 Section 197(a) provides that a taxpayer shall be entitled to an amortization deduction with respect to any amortizable Section 197 intangible. The amount of such deduction shall be determined by amortizing the adjusted basis of such intangible ratably over the 15-year period beginning with the month in which such intangible was acquired.
2 See Section 197(d)(1)(E).
3 See Recovery Group, Inc. et al. v. Commissioner, T.C. Memo. 2010-76.