UNITED STATES TAX COURT



         FRONTIER CHEVROLET CO., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 19627-98.                      Filed May 14, 2001.



     P entered into a stock sale agreement in which P
redeemed 75 percent of its outstanding stock from C in
exchange for monetary consideration. P also entered
into a noncompetition agreement in which P agreed to
make monthly payments to C and S for a period of 5
years so long as C and S agreed not to compete with P.
P argues that it is permitted to amortize the
noncompetition agreement payments over 60 months, the
life of the agreement.

     Held: Sec. 197, I.R.C., requires that a covenant
not to compete entered into in connection with a direct
or indirect acquisition of an interest in a trade or
business be amortized over 15 years. The
noncompetition agreement was entered into in connection
with P’s redemption of its stock, which was an
acquisition of an interest in a trade or business. P
must amortize the noncompetition agreement payments
over 15 years.
                               - 2 -

     Peter T. Stanley, for petitioner.

     James R. Robb and Virginia L. Hamilton, for respondent.



                              OPINION


     RUWE, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes as follows:

               Year                      Amount
               1994                      $28,996
               1995                      135,880
               1996                      110,320

After concessions,1 the issue for decision is whether petitioner

must amortize noncompetition agreement payments over 15 years

pursuant to section 197.2

                            Background

     The parties submitted this case fully stipulated.   The

stipulation of facts, stipulation of settled issues, and the

attached exhibits are incorporated herein by this reference.

Petitioner is a corporation that had its principal place of

business in Billings, Montana, at the time it filed its petition.




     1
      The parties filed a stipulation of settled issues in which
they resolved all the issues raised in the notice of deficiency.
The remaining issue related to sec. 197 was raised by petitioner
in its amended petition.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -

     Petitioner is engaged in the trade or business of selling

and servicing new and used vehicles.3   Roundtree Automotive

Group, Inc. (Roundtree), is a corporation engaged in the trade or

business of purchasing and operating automobile dealerships and

providing consulting services to these dealerships.4   Frank

Stinson (Mr. Stinson) was involved in the operations of Roundtree

during the years 1987 through 1994.

     Roundtree originally purchased all the stock of petitioner

in August of 1987.   Consistent with Mr. Stinson’s and Roundtree’s

policy of management, petitioner filled the position of executive

manager of its dealership with one of Mr. Stinson’s long-term

employees, Dennis Menholt (Mr. Menholt).   As part of his

employment by petitioner, Mr. Menholt was allowed to purchase,

from 1987 through 1994, 25 percent of the stock of petitioner.

     In 1994, Mr. Menholt was the general manager of petitioner’s

automobile dealership located in Billings, Montana, and Mr.

Stinson was the president of Roundtree.    Mr. Stinson participated

in the management of petitioner’s business, particularly in

advertising and sales training.   Roundtree received monthly

payments of $22,000 for management services it performed for


     3
      Petitioner was formerly known as Frontier Chevrolet
Company. References to petitioner include events which occurred
when it was known as Frontier Chevrolet Company.
     4
      Roundtree was formerly known as FS Enterprises, Inc.
References to Roundtree include events which occurred when it was
known as FS Enterprises, Inc.
                                - 4 -

petitioner.   Prior to August 1, 1994, Roundtree owned 75 percent

of the stock in petitioner, and Mr. Menholt owned the remaining

25 percent.

     Petitioner entered into a “Stock Sale Agreement” with

Roundtree.    Effective August 1, 1994, petitioner redeemed all its

stock owned by Roundtree for $3.5 million.   The funds to redeem

the stock were borrowed from General Motors Acceptance

Corporation (GMAC), with liens placed on all tangible assets of

petitioner.   After the stock sale agreement, Mr. Menholt was the

sole remaining shareholder of petitioner.

     Petitioner also entered into a “Non-Competition Agreement”

(noncompetition agreement) with Mr. Stinson and Roundtree,

effective August 1, 1994.   The noncompetition agreement stated:

          To induce * * * [petitioner] to enter into and
     consummate the Stock Sale Agreement and to protect the
     value of the shares of stock being purchased, Roundtree
     and [Mr.] Stinson covenant, to the extent provided in
     Section 1 hereof, that Roundtree and [Mr.] Stinson
     shall not compete with * * * [petitioner’s] automobile
     dealership, stock of which was sold to * * *
     [petitioner] pursuant to the Stock Sale Agreement.

Section 1, entitled “Covenant Not to Compete”, provided that

Roundtree and Mr. Stinson would not compete with petitioner in

the car dealership business within Yellowstone County for a

period of 5 years.   The agreement stated that the competition

restrictions against Mr. Stinson and Roundtree “are reasonable

and necessary to protect the business and interest which * * *

[petitioner] under the Stock Sale Agreement is acquiring pursuant
                                - 5 -

to the Stock Sale Agreement”.   As consideration for the

obligations of Roundtree and Mr. Stinson, petitioner agreed to

pay Roundtree and Mr. Stinson $22,000 per month for 60 months.

The consideration under the noncompetition agreement was in

addition to the consideration petitioner paid to redeem its

stock.   In the event petitioner defaulted on the noncompetition

agreement payments, the entire amount of the remaining payments

would immediately become due and collectible, and the covenant

not to compete would terminate 90 days after such default.    If

Roundtree and Mr. Stinson breached their obligations under the

agreement, petitioner was entitled to one-half of the net profits

for 5 years of any business conducted which breached the covenant

not to compete.

     Due to the GMAC loan, petitioner was leveraged with large

interest expenses.   In the summer of 1994, petitioner was below

the minimum working capital requirements of its franchisor and

had to obtain a special waiver of working capital requirements in

order to continue holding its franchise.   There was no known

alternative to the noncompetition agreement with Roundtree and

Mr. Stinson in order to protect petitioner from their competition

in the Billings market.   Without the agreement, it would have

been difficult for petitioner to raise capital or to pay its loan

from GMAC.
                                - 6 -

     On its Federal income tax returns for the years 1994 through

1996, petitioner amortized the noncompetition agreement payments

over 15 years.    In 1999, petitioner filed a claim for refund for

the taxable years 1995 and 1996 on the basis that the

noncompetition agreement payments should be amortized over 60

months, the life of the agreement.      In its amended petition,

petitioner claims that it is entitled to a deduction for the

years 1995 and 1996 for the same reasons set forth in its claim

for refund.

                             Discussion

     The issue for decision is whether petitioner must amortize

noncompetition agreement payments to Roundtree and Mr. Stinson

over 15 years pursuant to section 197.

     Section 197(a) provides that “A taxpayer shall be entitled

to an amortization deduction with respect to any amortizable

section 197 intangible.”    The deduction is determined by

amortizing the adjusted basis of the intangible ratably over a

15-year period beginning with the month in which such intangible

was acquired.    See sec. 197(a).   An “amortizable section 197

intangible” is any section 197 intangible acquired by a taxpayer

after August 10, 1993,5 and held in connection with the conduct



     5
      See Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-
66, sec. 13261(g), 107 Stat. 540, for effective date; see also
Spencer v. Commissioner, 

, 87 n.30 (1998), affd.
without published opinion 

(11th Cir. 1999).
                                - 7 -

of a trade or business.   Sec. 197(c)(1).    A covenant not to

compete entered into in connection with a direct or indirect

acquisition of an interest in a trade or business is a section

197 intangible.6   See sec. 197(d)(1)(E).7

     Petitioner argues that it did not acquire any interest in a

trade or business; therefore, the covenant not to compete is not

a section 197 intangible and petitioner is permitted to amortize

the payments over 60 months, the life of the covenant.     This is

the first instance in which we have the opportunity to consider

the statutory requirements of section 197 as they relate to a



     6
      Under prior law, amounts paid for a covenant not to compete
were amortizable over the life of the covenant. See Newark
Morning Ledger Co. v. United States, 

(1993); Warsaw
Photographic Associates v. Commissioner, 

, 48 (1985).
Sec. 197(b) provides that “Except as provided in subsection (a),
no depreciation or amortization deduction shall be allowable with
respect to any amortizable section 197 intangible.”
     7
      Sec. 197(d)(1) provides, in pertinent part:

          SEC. 197(d). Section 197 Intangible.--For
     purposes of this section--

               (1) In general.--Except as otherwise
          provided in this section, the term “section 197
          intangible” means--

               *      *     *     *     *       *     *

                    (E) any covenant not to compete (or
               other arrangement to the extent such
               arrangement has substantially the same effect
               as a covenant not to compete) entered into in
               connection with an acquisition (directly or
               indirectly) of an interest in a trade or
               business or substantial portion thereof * * *
                               - 8 -

covenant not to compete.

     Petitioner entered into a stock sale agreement with

Roundtree.   Under the terms of that agreement, petitioner

redeemed 75 percent of its stock from Roundtree for $3.5 million.

Petitioner also entered into a noncompetition agreement with

Roundtree and Mr. Stinson.   A purpose of the noncompetition

agreement was:

     To induce * * * [petitioner] to enter into and
     consummate the Stock Sale Agreement and to protect the
     value of the shares of stock being purchased, Roundtree
     and [Mr.] Stinson covenant, to the extent provided in
     Section 1 hereof, that Roundtree and [Mr.] Stinson
     shall not compete with * * * [petitioner’s] automobile
     dealership, stock of which was sold to * * *
     [petitioner] pursuant to the Stock Sale Agreement.

The noncompetition agreement prohibited Roundtree and Mr. Stinson

from competing with petitioner in the car dealership business

within Yellowstone County for a period of 5 years.   The facts

establish, and petitioner does not dispute, that the

noncompetition agreement was entered into “in connection with”

the stock sale agreement.

     Petitioner argues that it did not acquire an interest in a

trade or business pursuant to the stock transaction because, both

before and after the transaction, petitioner was engaged in

exactly the same trade or business and it acquired no other new

assets.   Respondent argues that petitioner’s redemption of its

stock was an “acquisition” of an interest in a trade or business

within the meaning of section 197.
                               - 9 -

     Normally, we look to the plain language of a statute to

interpret its meaning.   See Consumer Prod. Safety Commn. v. GTE

Sylvania, Inc., 

, 108 (1980); Union Carbide Foreign

Sales Corp. v. Commissioner, 

, 430 (2000).     When a

statute is clear on its face, we require unequivocal evidence of

legislative purpose before interpreting the statute to override

the plain meaning of the words used therein.    See Hirasuna v.

Commissioner, 

, 1224 (1987); Huntsberry v.

Commissioner, 

, 747-748 (1984).     The legislative

history of section 197 contains no evidence that Congress

intended a purchase of stock to be 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    

Redemption, in the context of securities, is defined as “The

reacquisition of a security by the issuer.”9    

instant


     8
      See Boyle v. Commissioner, 

, 1390 n.7 (1950),
affd. 

(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
                                                   (continued...)
                                - 10 -

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:


     9
      (...continued)
corporation if it acquires its stock from a shareholder in
exchange for property. See also Steffen v. Commissioner, 

, 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. * * *
                              - 11 -

          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.]

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”.   

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
                              - 12 -

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
                              - 13 -

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.