101 T.C. 581">*582 OPINION

RUWE, Judge: Respondent determined deficiencies in petitioner's Federal income taxes and additions to tax as follows:

The issues for decision are: (1) Whether certain amounts paid to petitioner's majority shareholder constitute ordinary and necessary business expenses deductible under section 162(a); ¹ (2) if not, whether such payments secured a long-term benefit properly characterized as an intangible asset amortizable1993 U.S. Tax Ct. LEXIS 90">*92 over its useful life; and (3) whether petitioner is liable for additions to tax as determined by respondent. ²

101 T.C. 581">*583 The parties submitted this case fully stipulated. The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference. Petitioner is an Oregon corporation whose principal office is located in Portland, Oregon.

Petitioner is the franchisee in 17 H & R Block, Inc. (Block), franchise agreements. Through these exclusive agreements, petitioner has operated from 60 to 72 offices offering Block tax return preparation services in all the significant cities in Oregon and southwest Washington 1993 U.S. Tax Ct. LEXIS 90">*93 during the years at issue. Fourteen of these franchise agreements were assigned to petitioner in 1977 by the estate of the original franchisee, Theodore H. Johnson, who died in that year. Mr. Johnson's tax return preparation business was generally profitable prior to his death.

Under a stock redemption plan dated March 1, 1978, petitioner provided the funds to satisfy the $ 1,158,129 estate tax liability of Mr. Johnson's estate by redeeming 31 of the 100 shares held by Mr. Johnson's estate at a cost of $ 37,359 per share. In 1979, petitioner paid approximately $ 155,000 in Federal income tax deficiencies under an assessment for accumulated earnings tax liability.

When Mr. Johnson's estate closed, his wife, Barbara K. Johnson, became majority shareholder of petitioner, owning 42 shares. Six shares were placed in a stock redemption trust for the payment of Mr. Johnson's estate taxes. The remaining 21 shares were owned by Mr. Johnson's mother, Hillie S. Johnson, and his three children from a previous marriage. Subsequently, Mrs. Johnson acquired 4 shares owned by Hillie S. Johnson, for a price of $ 37,359 per share.

Dissension soon developed between petitioner and the three children. 1993 U.S. Tax Ct. LEXIS 90">*94 This adversely affected the operation of petitioner's business. In 1980, the individual minority shareholders agreed to allow petitioner to redeem their 17 shares at a purchase price of approximately $ 41,434 per share, for a total cost to petitioner of approximately $ 704,000 plus interest. Mrs. Johnson thereby became petitioner's sole shareholder.

By April 30, 1983, petitioner was experiencing cash-flow problems and showed a negative net worth of approximately $ 718,000 on its tax return. In the spring of 1983, petitioner's bank terminated petitioner's line of credit and demanded payment of its $ 1.25 million loan. After failing to find alternative bank financing, Mrs. Johnson, desiring to sell all her shares, began to look for a buyer for petitioner. In August101 T.C. 581">*584 1983, Mrs. Johnson began negotiations with Tax and Estate Planners, Inc. (Tax Planners), an owner and operator of Block franchises. These negotiations were vigorous, protracted, and genuinely arm's length; both parties were represented by counsel at all material stages.

A key issue in the negotiations was the royalty paid by petitioner to Block. Petitioner held three franchises (the 5-percent franchises) requiring1993 U.S. Tax Ct. LEXIS 90">*95 royalty payments of only 5 percent of gross receipts. Typically, Block requires a 10-percent royalty rate from its franchisees. Petitioner acquired the 5-percent franchises by assignment from the estate of Mr. Johnson, and they produced the great majority of petitioner's revenues. The remainder of petitioner's 17 franchises (including 11 assigned by Mr. Johnson's estate) required a minimum royalty payment of 10 percent of the gross receipts of the respective franchises (the 10-percent franchises).

The franchise agreements specified that in order to retain the favorable 5-percent royalty rate, the three franchises had to be owned by Mrs. Johnson, or a child or sibling of the original franchisee, Mr. Johnson, or a trust, corporation, partnership, or other entity controlled by said persons. If the franchises or the specified ownership interests were transferred or assigned in conflict with these terms, an "event of increase" would occur, causing the royalty rate to increase to 10 percent.

Tax Planners believed that retaining the 5-percent rate on the three franchises was crucial to petitioner's continued viability. Consequently, Tax Planners and Mrs. Johnson negotiated a stock1993 U.S. Tax Ct. LEXIS 90">*96 sale agreement providing for: (1) The sale of 19 of Mrs. Johnson's 46 shares of petitioner's stock to Tax Planners; (2) Tax Planners' purchase of an option on the remaining shares of petitioner owned by Mrs. Johnson; (3) Tax Planners' management of petitioner's daily operations; (4) a loan from Tax Planners to petitioner for working capital; and (5) a consulting arrangement with Mrs. Johnson. For its management of daily operations, ³ Tax Planners was to receive an annual fee equal to 75 percent of petitioner's net pretax profit. ⁴ Also under the stock sale agreement, Tax101 T.C. 581">*585 Planners was authorized to, and did, appoint two directors, a new president, and a new secretary/treasurer. Mrs. Johnson was authorized to, and did, appoint three directors.

1993 U.S. Tax Ct. LEXIS 90">*97 To provide security for its working capital loan to petitioner, ⁵ Tax Planners took first- or second-priority liens on assets of petitioner and its subsidiaries, in addition to purchasing an option on Mrs. Johnson's remaining shares. This option gave Tax Planners a first right of refusal on those shares at a predetermined price. As consideration for the option, the stock sale agreement required Tax Planners to pay $ 1,400 per month to Hillie S. Johnson (Mr. Johnson's mother) for the rest of her life, then $ 1,000 per month to Mrs. Johnson for the rest of her life. The exercise price under the option was $ 915.79 per share, the same price at which Tax Planners had purchased its 19 shares.

Under the franchise agreements involved here, Block requires that a director or partner be listed as "Designated1993 U.S. Tax Ct. LEXIS 90">*98 Principal", "who will personally assume and be bound by all the terms, covenants and conditions of" the agreements. Block may look to such individual, in addition to the business entity, for the proper performance of the franchise agreement.

The consulting arrangement provided that petitioner would pay Mrs. Johnson $ 100,000 per year in monthly installments to compensate her for (a) refraining from causing an "event of increase" (which would increase the royalty rate from 5 percent to 10 percent); (b) providing consulting services; (c) remaining as designated principal under the Block franchise agreements; and (d) her covenant not to compete against petitioner. Petitioner had the right to cancel and terminate all payments to Mrs. Johnson if she caused an "event of increase".

During a 5-year period, including the 3 years in issue, Mrs. Johnson received the following amounts through monthly installments: 101 T.C. 581">*586

1993 U.S. Tax Ct. LEXIS 90">*99 During the same 5-year period, petitioner paid royalties to Block under the three 5-percent franchises totaling $ 883,474. If Mrs. Johnson had caused the royalty rate to double to 10 percent on the 5-percent franchises, due to an "event of increase", petitioner would have been required to pay an additional $ 883,474 (for a total of $ 1,766,948) in royalties to Block.

On its Federal income tax returns for the years in issue, petitioner reported the payments to Mrs. Johnson as follows:

Of these payments, respondent allowed $ 20,000 per year as an ordinary and necessary business expense and disallowed the remaining payments. After receiving the notice of deficiency, petitioner filed a timely petition with this Court.

The parties have stipulated that, of the total amounts petitioner paid to Mrs. Johnson during each of the years in issue: (1) $ 20,000 per year (the amount allowed by respondent) was the value of1993 U.S. Tax Ct. LEXIS 90">*100 Mrs. Johnson's services actually rendered as a consultant and designated principal and for her covenant not to compete; and (2) none of the remaining amounts paid to Mrs. Johnson constituted payments made for these services. We must decide whether petitioner may deduct these remaining payments under section 162(a).

101 T.C. 581">*587 Section 162(a) allows as a deduction "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". The question before us is essentially one of fact. Walliser v. Commissioner, 72 T.C. 433">72 T.C. 433, 72 T.C. 433">437 (1979). Respondent's determination bears a presumption of correctness, and the burden of proof rests with petitioner. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933).

To qualify as an allowable deduction under section 162(a), an item must (1) be paid or incurred during the taxable year; (2) be for carrying on any trade or business; (3) be an expense; (4) be a necessary expense; and (5) be an ordinary expense. Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345">403 U.S. 345, 403 U.S. 345">352 (1971). There is no real dispute in this1993 U.S. Tax Ct. LEXIS 90">*101 case over requirements (1) and (2). The question here is whether the payments at issue were ordinary and necessary expenses.

"Necessary" expenses include those that are "appropriate and helpful" to the taxpayer's trade or business. 290 U.S. 111">Welch v. Helvering, supra at 113. The parties have stipulated that the excess of the payments over $ 20,000 each year was "made to promote TJE's profitability and reduce its expense of operating a tax return preparation franchise by avoiding greatly increased royalty expenses to Block." Tax Planners believed that retaining the 5-percent royalty rate on the three 5-percent franchises was crucial to petitioner's continued viability. Through payments to Mrs. Johnson of $ 335,000, ⁶ petitioner saved $ 883,474 in royalty fees over a 5-year period. Given these circumstances, we find that the full amount of the payments at issue was both appropriate and helpful to petitioner's trade or business. ⁷

1993 U.S. Tax Ct. LEXIS 90">*102 Expenses must also be "ordinary" to qualify for deduction under section 162(a). Respondent focuses on the unique nature of the payments in this case, noting that ordinary expenses must relate to a transaction "'of common or frequent occurrence in the type of business involved.'" INDOPCO, Inc. v. Commissioner, 503 U.S.    ,    , 112 S. Ct. 1039">112 S. Ct. 1039, 112 S. Ct. 1039">1044 (1992) (quoting Deputy v. du Pont, 308 U.S. 488">308 U.S. 488, 308 U.S. 488">495 (1940));101 T.C. 581">*588 see Boser v. Commissioner, 77 T.C. 1124">77 T.C. 1124, 77 T.C. 1124">1132 (1981) (ordinary expense must be "normal, usual, or customary") (amended 79 T.C. II), affd. in an unpublished opinion (9th Cir. 1983). However, this does not mean that an expenditure is deductible only when the taxpayer makes identical expenditures on a regular basis.

Ordinary in this context does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. None the less, the expense is an ordinary one because we know from experience1993 U.S. Tax Ct. LEXIS 90">*103 that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack. Cf. Kornhauser v. United States, 276 U.S. 145">276 U.S. 145. The situation is unique in the life of the individual affected, but not in the life of the group, the community, of which he is a part. At such times there are norms of conduct that help to stabilize our judgment, and make it certain and objective. The instance is not erratic, but is brought within a known type. [290 U.S. 111">Welch v. Helvering, supra at 114.]