Frontier Chevrolet Company v. Commissioner of Internal Revenue

Frontier Chevrolet Company (“Frontier”) appeals the tax court’s decision that I.R.C. § 197 (“ § 197”) applied to a covenant not to compete entered into in connection with Frontier’s redemption of 75% of its stock. We agree with the tax court that Frontier’s redemption was an indirect acquisition of an interest in a trade or business; therefore Frontier had to amortize the covenant under § 197.

BACKGROUND

A.

The facts are set forth as stipulated by the parties before the tax court. At the time Frontier filed its petition with the Tax court, it was a corporation with its principal place of business in Billings, Montana. Frontier engaged in the trade or business of selling and servicing new and used vehicles. Roundtree Automotive Group, Inc. (“Roundtree”) was a corporation engaged in the trade or business of purchasing and operating automobile dealerships and providing consulting services to those dealerships. Frank Stinson (“Stinson”) was the President of Round-tree and participated in Frontier’s management from 1987 to 1994.

In 1987, Roundtree purchased all of Frontier’s stock. Consistent with Round-tree and Stinson’s policy of management, Frontier filled the position…