excluded from the meaning of the term "acquisition" simply because the purchase occurred in the form of a redemption.

The term "“acquisition" is defined as "The gaining of possession or control over something" and "Something acquired". Black's Law Dictionary 24 (7th ed. 1999). The term "redemption" is defined as "The act or an instance of reclaiming or regaining possession by paying a specific price."8 Id. at 1282. Redemption, in the context of securities, is defined as “The reacquisition of a security by the issuer."9 Id. In the instant case, petitioner entered into a stock sale agreement in which it redeemed 75 percent of its outstanding stock from Roundtree. As a result of the stock sale agreement, petitioner regained possession and control over its stock. On the basis of the plain meaning of the statute, we conclude that the redemption was an "acquisition" within the meaning of section 197 because petitioner received 75 percent of its stock as a result of the transaction with Roundtree. 10

In order for section 197 to apply, petitioner must have directly or indirectly acquired an "interest in a trade or business". The relevant legislative history of section 197 provides:

The term "section 197 intangible" also includes any covenant not to compete (or other arrangement to the extent that the arrangement has substantially the same effect as a covenant not to compete) entered into in connection with the direct or indirect acquisition of an interest in a trade or business (or a substantial portion thereof). For this purpose, an interest in a trade or business includes not only the assets of a trade or business, but also stock in a corporation that is engaged in a trade or business or an interest in a partnership that is engaged in a trade or business. [H. Rept. 103-111, at 764 (1993), 1993-3 C.B. 167, 340; emphasis added.]

8 See Boyle v. Commissioner, 14 T.C. 1382, 1390 n.7 (1950), affd. 187 F.2d 557 (3d Cir. 1951), for a detailed discussion of the origin and meaning of the term “redemption”.

9 We note that under sec. 317(b) (relating to corporate distributions and adjustments), stock is treated as redeemed by a corporation if it acquires its stock from a shareholder in exchange for property. See also Steffen v. Commissioner, 69 T.C. 1049, 1054 (1978) (redemption under sec. 317(b) is defined as a corporation's acquisition of its stock from a shareholder in exchange for property).

10 Although not applicable to the instant case because the noncompetition agreement was entered into before its effective date, sec. 1.197-2(b)(9), Income Tax Regs., supports respondent's argument that the term “acquisition” includes a redemption of stock. Sec. 1.197–2(b)(9), Income Tax Regs., provides, in pertinent part:

Section 197 intangibles include any covenant not to compete, or agreement having substantially the same effect, entered into in connection with the direct or indirect acquisition of an interest in a trade or business or a substantial portion thereof. For purposes of this paragraph (b)(9), an acquisition may be made in the form of an asset acquisition * * * a stock acquisition or redemption, and the acquisition or redemption of a partnership interest. * * *

See also H. Conf. Rept. 103–213, at 677 (1993), 1993-3 C.B. 393, 555 (using language nearly identical to that used in the House report). The legislative history explains that an "acquisition of stock that is not treated as an asset acquisition" is treated as "an indirect acquisition of a trade or business". Id. at 694, 1993-3 C.B. at 572. Thus, the legislative history indicates that an interest in a trade or business includes not only the direct acquisition of the assets of the trade or business but also the acquisition of stock in a corporation that is engaged in a trade or business.

The noncompetition agreement provides that the covenant not to compete was "reasonable and necessary to protect the business and interest which *** [petitioner] under the Stock Sale Agreement is acquiring pursuant to the Stock Sale Agreement”. Petitioner acquired 75 percent of its stock when it entered into the stock sale agreement with Roundtree. Petitioner is a corporation engaged in the trade or business of selling and servicing new and used vehicles. Thus, when petitioner executed the stock sale agreement it indirectly acquired an interest, in the form of stock, in a corporation engaged in a trade or business.

Petitioner agrees that section 197 might apply if it had acquired a new trade or business, but it contends that the statute does not apply in the instant case because petitioner continued the operation of its own existing business. Neither the statute nor the legislative history contains any indication that an interest in a new trade or business must be acquired in order for section 197 to apply. Accordingly, we find that petitioner acquired an "interest in a trade or business" within the meaning of section 197 when it redeemed its stock from Roundtree.

Finally, petitioner appears to argue that even if there was an acquisition of an interest in a trade or business, it was by a shareholder and not petitioner. Both the stock sale agreement and the noncompetition agreement identify petitioner, Roundtree, and Mr. Stinson, as the parties involved in the agreements. Under the terms of the stock sale agreement, Roundtree agreed to transfer the stock directly to petitioner, not to any shareholders of petitioner. In its brief, petitioner states that the noncompetition agreement was not entered into by any shareholders of petitioner. Accordingly, petitioner's argument lacks merit.

We find that the noncompetition agreement was entered into in connection with an acquisition of an interest in a trade or business. Therefore, we hold that petitioner must amortize the noncompetition agreement payments to Roundtree and Mr. Stinson over 15 years pursuant to section 197.

Decision will be entered under Rule 155.

GARY D. AND LINDY H. COMBRINK, PETITIONERS v.
COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT

Docket No. 13580-99.

Filed May 15, 2001.

By order dated August 14, 2001, this opinion filed May 15, 2001 was withdrawn. This opinion now appears at 117 T.C. 82 (2001).

Pages 298-307 have been deleted from this volume.

MEDCHEM (P.R.), INC., PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT

MEDCHEM PRODUCTS, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 4065-98, 4066–98.

Filed May 18, 2001.

P-USA is a corporation that is headquartered and has its manufacturing facility in the United States. Its wholly owned subsidiary is P-PR, which lists as its headquarters, officers, and directors the headquarters, officers, and directors of PUSA. A is a corporation unrelated to Ps that manufactures in Puerto Rico a drug named Avitene. On Dec. 18, 1987, A and certain related entities sold to Ps the equipment, technology, and other assets (except A's manufacturing facility in Puerto Rico) connected to Avitene's manufacturing. As part of the sale, A agreed to continue manufacturing Avitene primarily for P-PR using the facility and labor furnished by A and the raw materials and equipment furnished by P-PR. (A also used P-USA's technology.) In return, P-PR generally agreed to pay A a fee equal to its manufacturing costs plus 10 percent. Throughout most of the relevant period, P-PR had no employees and reported as its primary source of income receipts from the sale of Avitene. P-PR deducted from those receipts amounts that it paid to P-USA and A for labor that they