Frontier Chevrolet Company v. Commissioner

Frontier Chevrolet Company (Frontier) (plaintiff) sold used cars. Roundtree Automotive Group, Inc. (Roundtree) bought and operated car dealerships. Roundtree bought all of Frontier’s stock, eventually transferring 25 percent of the shares of stock to Dennis Menholt, Frontier’s new executive manager. Years later, Frontier repurchased its stock from Roundtree with funds it was loaned by a finance company. While repurchasing its stock, Frontier also entered into a covenant not to compete with Roundtree. Roundtree agreed not to compete with Frontier in the car-dealership business for five years. Frontier agreed to pay Roundtree $22,000 each month of the five years as consideration for the covenant. Frontier amortized its covenant payments for three years, between 1994 and 1996, under § 197 of the Internal Revenue Code. Section 197 governs the amortization of intangible items that are acquired by a taxpayer and held in connection with a trade or business, including covenants not to compete that are entered into in connection with the purchase of a portion of a trade or business. Years later, Frontier requested a refund connected with its earlier amortization, arguing that the covenant not to compete should be amortized over the life of the covenant instead of under § 197. The United States Tax Court held that Frontier’s repurchase of its own stock from Roundtree was an indirect acquisition of its business. Therefore, the covenant not to compete had to be amortized under § 197. Frontier disagreed, arguing that it had not acquired a new asset when it repurchased the stock. Frontier appealed.