INDEX-DIGEST

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AMORTIZATION

Installment Contract Servicing Business-Employee Sala-
ries and Benefits Directly Related to Acquisition of Con-
tracts-Private Offering Expenditures.-Where in 1993-94
petitioners were shareholders of cash method S corporation X that
acquired and serviced installment contracts that automobile dealers
had obtained from high credit risk individuals; X typically paid 65%
of contract face value in exchange for all principal and interest pay-
ments due from borrower; X's employees performed preacquisition
credit reviews in order to decide whether X should acquire contracts
and subsequently performed additional services in paying sellers of
acquired contracts; under sec. 162(a) X currently deducted (1)
employee salaries, benefits, and overhead (printing, telephone, com-
puter, rent, and utilities) relating to installment contract acquisi-
tions and (2) professional fees, commissions, and offering expendi-
tures relating to 1993 private placement offering of subordinated
asset notes and to 1994 offering abandoned before implementation;
and Commissioner determined all of X's payments for salaries,
benefits, and overhead related to acquisition of contracts were sec.
263(a) capital expenditures, as were offering expenditures related to
notes, Court determined, using acquisition test, (1) salaries and
benefits were capital expenditures, since these items were directly
related to anticipated acquisitions of assets with expected useful
lives exceeding 1 year; (2) overhead expenses were currently deduct-
ible under sec. 162(a), since they were not directly related to antici-
pated acquisitions and any future benefit X received was incidental
to payment of these expenses; (3) under sec. 165(a), portion of
capitalized salaries and benefits attributable to contracts X did not
acquire could be deducted in respective years when X ascertained
those contracts would not be acquired; (4) X was required to capital-
ize all offering expenses, since those payments were expected to
provide significant future benefits; and (5) under sec. 165(a), por-
tion of capitalized offering expenses attributable to abandoned offer-
ing could be deducted in 1994. Lychuk v. Commissioner

Noncompetition Agreement-Shareholder's Stock Redemp-
tion With Related 60-Month Noncompetition Agreement-
Applicability of Sec. 197 15-Year Amortization Period for
Acquisition of Interest in Trade or Business.-Where in 1994
petitioner automobile dealership corporation X redeemed 75% of its
outstanding stock from Y corporation, leaving individual A sole

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AMORTIZATION-Continued

owner of X; X simultaneously entered into noncompetition agree-
ment with Y and with B, principal involved in management of X
and Y, in which Y and B agreed not to compete with X for 60
months; in 1994–96, X was amortizing noncompetition agreement
over 15 years pursuant to sec. 179, but in 1999 X filed claim for
refund contending noncompetition agreement should be amortized
over its 60-month life, Court determined X was required to amortize
noncompetition agreement over 15 years, since agreement was
entered into in connection with X's redemption of it stock, and sec.
197 requires 15-year amortization of covenants not to compete
entered into in connection with direct or indirect acquisition of
interest in trade or business. Frontier Chevrolet Co. v. Commis-
sioner

BASIS

Real Estate Developer-Alternative Cost Method-Esti-
mated Construction Costs and Future-Period Interest
Expenses Relating to Common Improvements.-Where in 1994
petitioners were shareholders of S corporation X that was real
estate developer of golf course residential community; in 1994, X
contracted to construct golf course with attendant clubhouse facili-
ties for Y corporation that sold club memberships; during construc-
tion, X put deed to club and golf course in escrow, and Y put mem-
bership fees in escrow pending transfer of deed from X to Y; on July
19, 1996, golf course and clubhouse opened, and deed was trans-
ferred out of escrow on Apr. 21, 1999, after settlement of lawsuit;
in calculating gain on sale of residential lots under alternative cost
method of Rev. Proc. 92-29, 1992-1 C.B. 748, X allocated to its
bases in lots sold (1) estimated construction costs relating to com-
mon improvements to development and (2) estimated future-period
interest expense relating to common improvements; and Commis-
sioner contended X had ownership interest in clubhouse during
construction period and through date of transfer of title in 1999
that disqualified X from using alternative cost method, Court deter-
mined, under alternative cost method of Rev. Proc. 92-29, (1) X
properly allocated to its bases in lots sold $3,707,662 in estimated
construction costs relating to common improvements, since X did
not have interest subject to recovery through depreciation in club-
house in construction period before it was placed in service on July
19, 1996, and then Y held benefits and burdens of ownership during
transition period; and (2) consistent with general economic perform-
ance rule of sec. 461(g) and (h), $5,861,595 in estimated, future-
period interest relating to common improvements was not allocable
to X's bases in lots sold. Hutchinson v. Commissioner

BURDEN OF PROOF

Shifting Burden to Commissioner-Taxpayer's Burden To
Introduce Credible Evidence-Commissioner's Burden of

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