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    Commissioner of Internal Revenue v. Gazette Tel. Co, 209 F.2d 926, 10th Cir. (1954)

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    The Commissioner appealed a Tax Court decision allowing the Gazette Telegraph Company to amortize the asserted cost of a covenant not to compete that was part of an acquisition of a newspaper business. The Tax Court found that the parties to the acquisition agreement separately valued the stock and the covenant not to compete in the sale contract. The appellate court affirmed, finding that where the covenant creates a separate asset that is being depleted over its determined life, the purchaser can amortize the price paid for it. Since the Tax Court found the covenant was separately valued and treated in the acquisition agreement, the company could amortize the cost of the covenant.

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    Commissioner of Internal Revenue v. Gazette Tel. Co, 209 F.2d 926, 10th Cir. (1954)

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    The Commissioner appealed a Tax Court decision allowing the Gazette Telegraph Company to amortize the asserted cost of a covenant not to compete that was part of an acquisition of a newspaper business. The Tax Court found that the parties to the acquisition agreement separately valued the stock and the covenant not to compete in the sale contract. The appellate court affirmed, finding that where the covenant creates a separate asset that is being depleted over its determined life, the purchaser can amortize the price paid for it. Since the Tax Court found the covenant was separately valued and treated in the acquisition agreement, the company could amortize the cost of the covenant.

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    Filed: 1954-01-30 Precedential Status: Precedential Citations: 209 F.2d 926 Docket: 4722_1

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    The Commissioner appealed a Tax Court decision allowing the Gazette Telegraph Company to amortize the asserted cost of a covenant not to compete that was part of an acquisition of a newspaper business. The Tax Court found that the parties to the acquisition agreement separately valued the stock and the covenant not to compete in the sale contract. The appellate court affirmed, finding that where the covenant creates a separate asset that is being depleted over its determined life, the purchaser can amortize the price paid for it. Since the Tax Court found the covenant was separately valued and treated in the acquisition agreement, the company could amortize the cost of the covenant.

    Copyright:

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    Download as PDF or read online from Scribd
    Download as pdf
    19 views4 pages

    Commissioner of Internal Revenue v. Gazette Tel. Co, 209 F.2d 926, 10th Cir. (1954)

    Uploaded by

    Scribd Government Docs
    The Commissioner appealed a Tax Court decision allowing the Gazette Telegraph Company to amortize the asserted cost of a covenant not to compete that was part of an acquisition of a newspaper business. The Tax Court found that the parties to the acquisition agreement separately valued the stock and the covenant not to compete in the sale contract. The appellate court affirmed, finding that where the covenant creates a separate asset that is being depleted over its determined life, the purchaser can amortize the price paid for it. Since the Tax Court found the covenant was separately valued and treated in the acquisition agreement, the company could amortize the cost of the covenant.

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    of 4

    209 F.

    2d 926

    COMMISSIONER OF INTERNAL REVENUE


    v.
    GAZETTE TEL. CO.
    No. 4722.

    United States Court of Appeals Tenth Circuit.


    January 30, 1954.

    S. Dee Hanson, Sp. Asst. to Atty. Gen. (H. Brian Holland, Asst. Atty.
    Gen., Ellis N. Slack and A. F. Prescott, Sp. Assts. to Atty. Gen., on the
    brief), for petitioner.
    Dana Latham, Los Angeles, Cal. (John S. Welch and Latham & Watkins,
    Los Angeles, Cal., on the brief), for respondent.
    John L. J. Hart, Denver, Colo. (Stephen H. Hart, Claude M. Maer, Jr., and
    William P. Cantwell, Denver, Colo., on the brief), amici curiae.
    Before PHILLIPS, Chief Judge, and BRATTON and HUXMAN, Circuit
    Judges.
    BRATTON, Circuit Judge.

    This petition to review a decision of the Tax Court presents the question
    whether Gazette Telegraph Company, hereinafter referred to as the taxpayer, is
    entitled to amortize and deduct pro rata for the taxable years in question the
    asserted cost of a covenant not to engage in the newspaper business in El Paso
    County, Colorado, in competition with the taxpayer as assignee of the contract
    containing such covenant.

    The Tax Court found the facts, 19 T. C. 692; and as found by that court, these
    are the material facts. Gazette and Telegraph Company, hereinafter referred to
    as the old corporation, owned a plant and published a newspaper in Colorado
    Springs, Colorado. It had issued an outstanding 5,000 shares of capital stock,
    each of the par value of $100. Clarence Clark Hamlin Trust, El Pomar
    Investment Company, T. E. Nowels, Charles L. Tutt, John A. Carruthers,

    Richard W. Nowels, Frank R. Wadell, James R. Miller, Seddie G. Hamlin, and


    others were owners of stock. T. E. Nowels, president and general manager of
    the corporation, had wide experience as a newspaper publisher, and was well
    known in the community. He was in good health and had no intention of
    retiring. Richard W. Nowels, son of T. E. Nowels, was employed by the
    corporation, and he now publishes a newspaper in or near San Francisco,
    California. Frank R. Wadell, managing editor of the newspaper, was a capable
    man, and had wide experience in the newspaper business. James R. Miller was
    bookkeeper for the corporation. Some of the other stockholders were relatives
    of or otherwise closely connected with persons who were or had been
    associated with the company. R. C. Hoiles, a resident of California, was a man
    of wide experience in the newspaper business. Correspondence passed between
    Hoiles and Nowels with respect to the former and his associates acquiring the
    newspaper properties. In the course of the correspondence, Hoiles made it clear
    that the buyers would insist upon a covenant on the part of the sellers not to
    compete with the buyers in the newspaper business. And in one letter, Hoiles
    referred to an intent or purpose to set up on the books of a new corporation the
    amount of the covenant, amortize it, and thus reduce the taxes of himself and
    those associated with him. Hoiles and his two sons went to Colorado Springs
    for the purpose of conducting final negotiations for the purchase of the
    properties. Hoiles and his sons, as parties of the first part, and Nowels and other
    owners of stock as parties of the second part, entered into a written contract
    which provided among other things that the parties of the first part should pay
    to each of the thereto signing parties of the second part $200 for each share of
    stock set opposite their names, respectively; that the parties of the second part
    would not engage in the newspaper business in competition with the parties of
    the first part, their successors and assigns, in the county in which Colorado
    Springs was situated for a period of ten years from and after the date of the
    contract; and that the two items of sale were evaluated, (a) the stock at $150 per
    share, and (b) the prohibition and refraining from carrying on business as set
    forth therein at $50 per share of the stock. The negotiations for the purchase of
    the stock and the covenant not to compete were conducted at arm's length by
    strangers in interest; and negotiating in that manner, the parties fixed the price
    of the stock at $750,000 and the price of the covenant at $250,000. All of the
    stock issued by the old company was transferred to Hoiles and his associates,
    the $1,000,000 was paid, and the transaction was consummated. The taxpayer
    was organized shortly after consummation of such transaction, and one of the
    assets transferred to it was the covenant not to compete. Based upon the facts
    thus found, the Tax Court held that the taxpayer was entitled to amortize the
    asserted cost of the covenant and claim annual deductions pro rata during the
    life of the covenant. The Commissioner sought review.
    The Commissioner does not challenge the findings of fact made by the Tax

    The Commissioner does not challenge the findings of fact made by the Tax
    Court on the ground that they are not supported by substantial evidence or that
    they are clearly erroneous. Without challenging the findings, the Commissioner
    advances three points. One is that the Tax Court erred in holding that the
    taxpayer, as assignee of the contract, was entitled to amortize the asserted cost
    of the covenant of the selling stockholders not to engage in the newspaper
    business in competition with the taxpayer. Another is that the court erred in
    failing to find that the taxpayer was not entitled to amortize the asserted cost of
    the covenant. And the third is that the court erred in entering its decision for the
    taxpayer. It is manifest that the three points are intended to present in different
    language a single contention and therefore they may be considered together.
    Section 23(l) of the Internal Revenue Code, 26 U.S.C. 23(l), provides in
    substance that in computing net income there shall be allowed as a deduction a
    reasonable amount for the exhaustion, wear, and tear of property used in trade
    or business. Section 29.23(1) 1-3 of Treasury Regulation 111 was promulgated
    under the statute and is in harmony with it. Where a lump sum is paid for the
    properties of a going business together with intangibles and a covenant on the
    part of the seller not to compete with the purchaser or his assignee for a
    specified period of time, and the covenant against competition is not treated
    separately in respect to cost and value but is nonseverable, the purchaser has no
    warrant in the statute or the regulation to treat any part of the price paid as the
    cost of the covenant subject to depreciation. Toledo Blade Co. v. C. I. R., 11
    T.C. 1079, affirmed, 6 Cir., 180 F.2d 357, certiorari denied, 340 U.S. 811, 71
    S.Ct. 38, 95 L.Ed. 596; Burke, 18 T.C. 77. On the other hand, in a transaction in
    which property is sold and the seller covenants not to engage in business in
    competition with the purchaser for a specified period of time, if the parties in
    good faith and realistically treat the covenant in a separate and severable
    manner in respect to value and cost the purchaser may amortize the price paid
    for the covenant and claim annual deductions pro rata during the life of the
    covenant. Farmers Feed Company of New York, 17 B.T.A. 507; Christensen
    Machine Co., 18 B.T.A. 256; Eitingon-Schild Company and Subsidiaries, 21
    B.T.A. 1163; B. T. Babbitt, Inc., 32 B.T.A. 693; Christensen Machine Co. v.
    United States, Ct.Cl., 50 F. 2d 282.
    In the transaction under consideration, the assignors of the taxpayer acquired
    capital stock in the old corporation and a covenant not to compete. By the
    contract, the two were treated in a separate and severable manner in respect to
    value. A specified value was placed upon the stock, a fixed value was placed
    upon the covenant, and the assignors of the taxpayer paid the aggregate of the
    two. Under the facts found by the Tax Court, the covenant created a new and
    valuable right in the hands of the purchasers for which they paid a separate
    consideration. The covenant had a life of ten years. Upon the expiration of that
    period its value will be exhausted. Its value has been and is being exhausted

    ratably by the passage of time. And in such circumstances, the taxpayer as


    assignee of the contract is authorized to claim deductions pro rata during the
    life of the covenant. Farmers Feed Company of New York, supra; Christensen
    Machine Co., supra; Eitingon-Schild Company and Subsidiaries, supra; B. T.
    Babbitt, Inc., supra; Christensen Machine Co. v. United States, supra.
    5

    The decision of the Tax Court is affirmed.

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