Category: Accounting Periods & Methods; Sales & Exchanges; Deductions & Credits
Subject: Amortization of Intangibles
Title: Covenant-Not-To-Compete; Use of "Likeness" of Individual
IRC Sections: 197
Filename: 1168.html
Date Produced: 8/96

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Background
Taxpayer purchased a business. Part of the purchase price relates to a covenant-not-to-compete covering a ten-year period of time with an option to renew at the choice of the payor. Also included in the purchase is the right to use the "likeness" of a certain person for television advertising.

Issue
What is the amortization period for these two intangible assets?

Answers
1. The covenant-not-to-compete is covered under Section 197 and must be amortized over a 15-year life.

2. To be addressed later in the week. I think I need some more information about this, see below.

Discussion: Issue One
Section 197 explicitly includes a covenant-not-to-compete or similar right in the intangibles subject to the mandatory 15-year amortization rules. See Section 197(d)(1)(E). The covenant in question must have been created either directly or indirectly in the acquisition of a trade or business or substantial portion thereof.

Issue Two: Need More Facts
I think I need to know how the "likeness" fits into the business.

Is the "likeness" part of a trademark? For example, the likeness of Harland Sanders (aka Colonel Sanders) seems to be part of the Kentucky Fried Chicken logo, which I assume is trademark protected. I would assume that the same goes for Paul Newman's likeness on the salad dressing brand, Newman's Own. I don't think the likeness itself is trademark protected, but if the likeness is part of something that is, there may be Section 197 implications for us.

To what extent is the "likeness" connected with the particular brand of product or service in question? If there is a very strong connection, it seems to me that there is an argument that the likeness is similar to goodwill. The Harland Sanders example above is good here too. Question: what does the public think of when they see the stylized image of Harland Sanders? Answer: Kentucky Fried Chicken. On the other hand, if the likeness is just a recognizable spokesperson, for example an Olympic athlete whose likeness is used on a box of Wheaties cereal, I think this could be viewed in an entirely different manner.

If it would be acceptable to your client, I think it would be extremely helpful to know the person whose likeness is in question here and the type of business involved. This is the type of thing that is very difficult to talk about in the abstract as a hypothetical.